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V 



MATERIALS FOR THE STUDY 
OF ECONOMICS 



CURRENT ECONOMIC PROBLEMS 



THE UNIVERSITY OF CHICAGO PRESS 
CHICAGO, ILLINOIS 



AgftttB 
THE CAMBRIDGE UNIVERSITY PRESS 

LONDON AND EDINBURGH 

THE MARUZEN-KABUSHIKI-KAISHA 

TOKYO, OSAKA, KYOTO 

KARL W. HIERSEMANN 

LEIPZIG 

THE BAKER & TAYLOR COMPANY 

NEW YOEK 



CURRENT ECONOMIC 
PROBLEMS 

A SERIES OF READINGS IN THE CONTROL OF 
INDUSTRIAL DEVELOPMENT 



EDITED BY 

WALTON HALE HAMILTON 




THE UNIVERSITY OF CHICAGO PRESS 
CHICAGO, ILLINOIS 



\A6 






Copyright IQ14 By 

Walton H. Hamilton 

Copyright iqis By 

The University oe Chicago 



All Rights Reserved 



Preliminary Edition Privately Printed By 
The University of Michigan 1914 



Published August 1915 



SEP -7 1915 



Composed and Printed By 

The University of Chicago Press 

Chicago, Illinois, U.S.A. 



iCI,A411369 



PREFACE 

The addition of this collection of readings to the long list of 
books in elementary economics is due to no premeditated design. 
It had assumed dimensions too formidable to be suppressed before 
the decision to publish it was made. It has emerged as a by-product 
of some years of experience with classes in current economic 
problems. Its beginning is to be found in the use, as supplementary 
material, of some readings quite different in kind from the matter 
presented in the texts. As time has passed, the purpose, viewpoint, 
subject-matter, and arrangement of the course have all undergone 
constant modification. The readings, accordingly, have also 
changed in purpose, in character, and in arrangement. They have 
increased in number until the collection eventually has come to 
assume pretentious size. Its growth has known its periods of 
gradual accretion and its times of stress and strain. The latter 
have resulted in the appearance of a collection of readings in 
mimeographed form nearly three years ago, a revision in printed 
form a year later, and the present re-revised edition. Its gradual 
emergence is the result, in part of the editor's developing conception 
of the subject, in part of class room experience. Unfortunately 
both of these fotces impelling development are still in process. The 
editor can, accordingly, give no guaranty that for the indefinite 
future he will vouch for the present collection, either in its general 
outlines, or in its detailed arrangement. But, if there is to be no 
end, there must be, for a time at least, a respite from experimen- 
tation. 

An attempt has been made to adapt these readings to the needs 
of an introductory course. This has been all the more necessary, 
because the greater part of them were not intended for this use. 
This adaptation has involved the elimination of extraneous matter, 
as well as the omission of discussions of subtle points. The latter, 
however valuable to advanced students, are likely to divert the 
minds of novices in economics from the main issues. In this 
process most of the readings have been reduced materially in length. 
In many cases the reduction has been quite drastic. Since this vol- 
ume is not intended for reference purposes, the omissions have 
not been indicated in the text. The footnotes of the originals, except 
where imperatively demanded, have been dispensed with. Most of 
the titles are of the editor's selection. An attempt has been made, 
however, faithfully and accurately to preserve the viewpoint and 



viii PREFACE 

thought of the authors. Very little liberty has been taken with 
their words, the few verbal changes made being intended to estab- 
lish coherence. 

The dates in the bibliographical footnotes are intended to repre- 
sent, not the copyrights of the books from which the readings are 
taken, but the first appearances of the selections in the forms in 
which they are given here. 

A cursory examination of this volume will furnish sufficient 
evidence that the editor could not, no matter how ardent his de- 
sires, assume responsibility for the opinions expressed in the read- 
ings. For the volume as a whole his responsibility is only that of 
selecting efficient teaching materials and presenting faithfully the 
various elements and attitudes which are factors in current economic 
problems. He is, of course, responsible for the unsigned readings. 
But these were written, in lieu of selections by others for which 
he made diligent but futile search, to meet definite classroom needs. 
Several of them are quite at variance with his own opinions. He 
accepts, however, full responsibility for the opinions expressed in 
the various introductory sections. 

The editor has used the book to meet two needs. The first is that 
of a course in current problems which complements a separate 
course in "principles." The second is in a course in general eco- 
nomics, covering both fields. In the former case he has relied upon 
it as the principal pedagogical instrument. In the latter he has used 
a text, one of the more unpretentious kind, to cover the work in 
value and distribution and for description of economic mechanism. 
In both cases he has used problems and exercises as supplementary 
material. The book has sufficient volume for a year's work. It 
should serve the need of one semester course, perhaps all the better, 
by presenting a wide variety of subjects from which to choose the 
particular topics which are to be discussed. If a part remain unused, 
so much the better; it will concretely illustrate the too often 
neglected truth that the subject of study is too large to be pent up in 
any course or textbook. Perhaps it is permissible to state in pass- 
ing that the editor has in preparation a book of outlines, exercises, 
and problems covering the field of this volume. He expects to 
publish it within the next few months. 

In conclusion the editor wishes to acknowledge his obligations 
to those who have helped to make the book what it is. He has 
drawn, very largely upon the classroom experience of those who 
were associated with him at the University of Michigan in the 
course in "Current Economic Problems." He is also under par- 
ticular obligations to his former colleague. Professor Fred M. 
Taylor, of the University of Michigan, to whom, more than to 



I 



PREFACE IX 

anyone else, the publication of this volume is due ; and to his 
colleagues, Professors Leon C. Marshall and Harold G. Moulton, 
of the University of Chicago, who have made many valuable sug- 
gestions about subject-matter and the arrangement of the material. 
His obligations to various publishers, who have generously permitted 
the use of much valuable copyrighted material, are expressed in 
detail in the bibliographical footnotes. 

W. H. H. 
University of Chicago 
August 19, 1915 



TABLE OF CONTENTS 
Introduction 

PAGE 

I The Study of Current Economic Problems xxvii 

2. Economic Problems as Aspects of Social Development . . . xxxii 

I. The Antecedents of Modern Industrialism 
Introduction i 

A. Ideals Underlying Industrial Development 

1. The Essential Characteristics of Modern Industrialism ... 2 

2. Christian Teaching and Industrial Development. William 
Cunningham 5 



B. Manorial and Gild Economy 

3. The Manor, a Self-Sufficient Economy. William J. Ashley . 

4. Wage-Work and the Handicraft System. Carl Biicher . 

5. Ordinances of the Gild Merchant of Southampton . 

6. Ordinances of the White-Tawyers 

7. Preamble to the Ordinances of the Gild of the Tailors, Exeter 



7 
10 

13 

15 
IS 



C. Mediaeval Commerce 

8. A Definition of Commerce. J. Dorsey Forrest 16 

9. The Attitude of the Mediaeval Church toward Commerce. William 

J. Ashley 16 

10. The Contribution of the Church to Commercial Development. 

J. Dorsey Forrest 18 

11. Italian Commerce and Industry in the Fourteenth Century. 
Thomas B. Macaulay 20 

D. Mediaeval Industrial Policy 

12. The Spirit of Solidarity in the Mediaeval Town . . . . 21 

13. Articles of the Spurriers of London 24 

14. Mediaeval Tricks of Trade. Berthold von Regensburg ... 25 

15. The Control of Industry in the Gild Period. L. F. Salzmann . 27 

E. Mediaeval Economic Theory 

16. The Gospel of Stewardship. Thomas Aquinas 31 

17. The Usurer's Fate. Caesarius of Heisterbach . . . . . 32 

18. Usury versus the Boycott. Innocent III 33 

19. The Characteristics of Mercantilist Doctrine., John Kells Ingram ^s 



XIV CONTENTS 

B. Pecunevry Competition p^ge 

69. Economic Activity as a Struggle for Existence. Arthur Fairbanks 148 

70. Competition and Organization. Charles H. Cooley . . . .150 

71. The Beneficence of Competition. Charles Kingsley . . . 152 

72. Competition and Selfishness. S. J. Chapman 152 

73. The Ethics of Competition. J. A. Hobson 152 

74. State Determination of the Plane of Competitive Action. Henry C. 
Adams 154 

^ C. Price-Fixing by Authority 

75. The Statute of Laborers. Statutes of the Realm . . . . 156 

76. Price-Fixing by Commission. Martin Luther . . . . .158 

77. The Futility of Price-Fixing. John Witherspoon . . . . 159 

D. The Function oe Middlemen 

78. A Condemnation of Forestallers. Statutes of the Realm . . 161 

79. If Forestallers Had Their Deserts. George Washington . . . 161 

80. The Function of the Middleman. Hartley Withers . . . 162 

81. Middlemen in the Produce Trade. Edwin G. Nourse . . . 163 

E. Speculation 

82. The Gamble of Life. John W. Gates . . . . . . .165 

83. The Twilight Zone. Harry J. Howland . . . . . . 165 

84. The Ethics of Speculation. Outlook 168 

85. The Utility of Cotton Futures. Alfred B. Shepperson . . . 170 

86. Hedging on the Wheat Market. Albert C. Stephens . . . .171 

87. The Ups and Downs of Securities. Francis W. Hirst . . . .173 

88. The Function of Exchanges. Charles A. Conant . . . .176 

89. The Experience of Germany with Stock Exchanges. The Hughes 
Committee 178 

F. The Corporation 

90. The Nature of the Business Corporation. Harrison S. Smalley . 180 

91. Corporate Distribution of Risk and Control. W. H. Lyon . . 184 

92. The Management of the Corporation. Wesley C. Mitchell . . 186 

93. The Ethics of Corporate Management. Henry Rogers Seager . 187 

94. The Corporation and Personal Efficiency. George W. Perkins . 189 

95. The Function of the Corporation. J. B. Canning 191 

V. Problems of the Business Cycle 

Introduction 195 

A. The Delicate Mechanism of Industry 

96. The Spirit of Business Enterprise. Wesley C. Mitchell . . . 196 

97. The Interdependence of Prices. Wesley C. Mitchell . . . 199 

98. The Sensitive Mechanism of Credit. Harold C. Moulton . . 202 

99. The "Planlessness" of Production. Wesley C. Mitchell . . . 206 



CONTENTS XV 

B. The Economic Cycle p^^j. 

loo. The Periodicity of Commercial Crises. J. S. Nicholson . . . 208 
loi. The Rhythm of Business Activity. Wesley C. Mitchell . . . 210 

C. The Antecedents of Crises 

102. The Causes of the Panic of 1893. W. Jett Lauck .... 216 

103. The Irrepressible Crisis. W. H. Lough, Jr 218 

104. Industrial Conditions Preceding the Panic. Moody's Magazine . 221 

105. The Arrested Crisis of 1907. Edwin R. A. Seligman . . . 223 

D. The Course of a Crisis 

106. The Course of the Panic of 1893. Alexander D. Noyes . . . 225 

107. The Course of the Panic of 1907. Ralph Scott Harris . . . 228 

108. The Order of Events in a Crisis. Arthur T. Hadley . . . 230 

E. Financial and Industrial Conditions during a Crisis 

109. A Week of Financial History. Commercial and Financial 
Chronicle 

no. General Industrial Conditions in a Crisis. Bradstreet's 

111. The Premium on Currency in 1893. Commercial and 
Chronicle 

112. The Hoarding of Currency in 1893. J. DeWitt Warner 

113. Estimate of Money Hoarded in 1907. Moody's Magazine . . 236 

114. Economies in Credit. Atlanta Clearing House. 

115. Shipment of Currency to the Interior. Commercial and 
Chronicle . 



Financial 



Financial 



232 
233 

235 
23s 



236 

237 



F. Industrial Conditions during a Depression 

116. Panics versus Depressions. George H. Hull 238 

117. The Extent of the Depression of 1907-8. Moody's Magazine . '239 

G. Typical Theories of Crises 

118. The Fruits of the Exploitation of Labor. Frank K. Foster . . 240 

119. The Impossibility of Over-Production. John Stuart Mill . . 242 

120. Sun-Spots and Crises. W. Stanley Jevons 243 

121. The Neo-Jevonian Theory. Alvin S. Johnson 245 

122. Capitalization and Crises. Frank A. Fetter . . . . . 246 

123. The Lagging Adjustment of Interest. Irving Fisher . . . 247 

H. Credit and Crises 

124. Inelasticity of Credit under the National Banking System. 
Harold G. Moulton 249 

125. How a Panic Was Averted'in 1914. Journal of Political Economy. 251 

126. Provisions for Elasticity in the New Currency Act. L. M. 
Jacobs, Jr .253 

127. Emergency Elasticity of Credit. Harold G. Moulton . . . 255 

128. Emergency Elasticity of Note Issue. Fred M. Taylor . . . 257 



xvi CONTENTS 

I. Control of the Industrial Cycle 

PAGE 

129. Panic Rules for Banks. Walter Bagehot 259 

130. The Part of Individual Responsibility. Theodore E. Burton . 260 

131. Bettering Business Barometers. Wesley C. Mitchell . . . 261 

132. The Severity of the Trade Cycle in America. W. A. Paton . . 265 

VI. Problems of International Trade 

Introduction 268 

A. The Basis of International Trade 

133. International Co-operation. Charles Gide .. . . . .270 

134. The Law of Comparative Costs. Fred M. Taylor .... 271 

135. The Theory of Free Trade 273 

B. The Mechanism of International Trade 

136. The Theory of International Exchange 275 

137. The Favorable Balance of Trade. Thomas Mun and Charles W. 
Fairbanks 277 

138. The Mystery of the Balance of Trade. Hartley Withers . . . 278 
139.' The Reciprocal Character of International Trade. Fred M. 

Taylor .281 

C. The Demand for Local Protection 

140. Keeping Trade at Home. Various Sources 284 

141. Remember Colorado. Denver Times 286 

142. The Seen and the Unseen. Frederic Bastiat 287 

D. The Perennial Argument for Protection 

143. Gold and Wealth. Martin Luther 289 

144. What the State Owes to Industry. George B. Curtiss . . . 289 

145. The Production of Prosperity. Daniel Defoe 291 

146. The Ten Commandments of National Commerce. A German 
Circular 292 

147. The Test of Faith. Roswell A. Benedict 293 

148. The Universal Fruits of Free Trade. Andrew Yarrington . . 294 

E. The Case for Protection 

149. Protection and Industrial Transformation. Friedrich List . . 295 

150. America's Allegiance to Protection. Albert J. Lefiingwell . . 296 

151. Present Validity of the Young-Industry Argument. Frank William 
Taussig 298 

152. Protection and the Formation of Capital. Alvin S. Johnson . . 301 

153. The Economics of Protection 304 

154. Protection and the National Defense 307 



CONTENTS xvii 

F. The Influence of the Tariff on Wages 



PAGE 



155. High Wages an Obstacle to Manufacture. Daniel Webster . . 309 

156. Protection and High Wages. American Economist . . . . 310 

157. The Effect of Industrial Changes on Wages. Alvin S.' Johnson . 311 

G. The Historical Setting of the Current Tariff Problem 

158. A Half-Century of Tariff History. Harrison S. Smalley . . . 313 

159. Recent Tariff History 317 

160. What a Tariff Bill is Like. The Underwood-Simmons Act . . 319 

H. The Argument from Experience 

161. Protection and Prosperity. Robert Ellis Thompson . . . 323 

162. American Free Trade and American Prosperity. George Baden- 
Powell . . . 324 

163. Free Trade and Prosperity. Liberal Party Pamphlet . I .325 

I. The Impracticable Nature of Protection 

164. A Humble Request of Congress. Wool Growers and Manufacturers 327 

165. Woolens and Welfare. N. T. Folwell 328 

166. A Recipe for Securing Duties. S. N. D. North and William 
Whitman 328 

167. The Tariff a Local Issue. Congressional Record .... 329 

168. Tariff for Politics Only. Peter Finley Dunne 330 

169. Tricks of Tariff Making 333 

' J. The Scientific Revision of the Tariff 

170. Producers' Costs and Tariff Duties. William C. Redfield . . 335 

171. Investigation and Tariff Legislation. Henry C. Emery . . . 340 

172. The Impossibility of Ascertaining Costs. H. Parker Willis . . 342 

VII. The Problem of Railway Regulation 

Introduction 344 

A. The Fundamental Factors of the Problem 

173. The Extent of American Railway Interests. I. Leo Sharfman 346 

174. The Dual Nature of the Railway Corporation 347 

175. The Economic Basis of Regulation. I. Leo Sharfman . . . 348 

176. The Futility of Railway Competition, Arthur T. Hadley . . 352 

B. Discriminatory Practices of the Railroads 

177. Types of Railway Discrimination. George H. Lewis . . . 355 

178. Discriminations between Commodities. Albert N. Merritt . 357 

179. Discriminations in the Transportation of Oil. Commissioner of 
Corporations 358 

180. Recent Forms of Railway Discrimination. William Z. Ripley . 361 



xviii CONTENTS 

C. The Nature and Extent of Regulation ^^^^ 

i8i. Complaints against the Railroad System. The CuUom Committee 364 

182. The Provisions of the Interstate Commerce Act. Logan G. 
McPherson ' 365 

183. The Provisions of the Elkins Act. Interstate Commerce Com- 
mission 366 

184. The Provisions of the Hepburn Bill. Logan G. McPherson . . 367 

185. The Mann-Elkins Act. Railway and Engineering Review . . . 369 

D. Aspects of Rate -Making 

186. Freight Classification. William Z. Ripley 370 

187. Competitive Factors in Rate-Making. Emery R. Johnson and 
Grover C. Huebner 372 

188. The Futility of Costs as a Basis for Rates. Sydney Charles Williams 374 

189. Charging What the Traffic Will Bear. W. M. Ackworth . . 377 

190. The Rate Theory of the Interstate Commerce Commission. 

M. B. Hammond 378 

E. Valuation of the Railroads 

191. Necessity for Valuation of Railway Property. Interstate Com- 
merce Commission 380 

192. Market Value as a Basis for Rates. Robert H. Whitten . . 381 

193. Physical Valuation as a Basis of Rates. Samuel O. Dunn . .382 

194. The " Railway- Value " of Land. United States Supreme Court . 386 

F. Government Ownership of Railroads 

195. The Drift toward Government Ownership. Frank Haigh Dixon . 388 

196. Government Ownership as a Refuge. Railway World . . . 389 

197. The Economies of Government Ownership. Frank Parsons . . 391 

198. The Inexpediency of Government Ownership. Samuel O. Dunn . 392 

VIII. The Problem of Capitalistic Monopoly 

Introduction 395 

A. Is Monopoly Inevitable? 

199. The Perennial Problem of Monopoly 397 

a) An Early Corner in Grain. Genesis 397 

b) A Vindication of Philosophy. Aristotle 398 

c) An Early Use of Class Price. John Gower 398 

d) In the Merrie England of Queen Bess. David Hume . . 399 

200. The Perennial Protest against Monopoly 400 

a) A Proverb about Corners. Proverbs 400 

b) The Ethics of Monopoly. Martin Luther 400 

c) The Pests of Monopoly. Sir John Culpepper .... 400 

d) The Inexpediency of Monopoly. Adam Smith .... 401 

e) Monopoly Indefensible. National Democratic Platform . . 401 



CONTENTS xix 

PAGE 

201. Monopoly, the Result of Natural Growth. George Gunton . . 401 

202. Monopoly, the Result of Artificial Conditions. Woodrow Wilson . 403 

B. Conditions of Monopolization 

203. The Failure of Competition. Henry W. Macrosty .... 405 

204. The Incentives to Monopoly. Chester W. Wright .... 408 

205. Large-Scale Production and Monopoly. Charles J. Bullock . .410 

206. Monopoly and Efficiency. Louis D. Brandeis 415 

C. The Influence of Monopoly on Price 

207. The Law of Monopoly Price. Henry Rogers S eager. . . .418 

208. The Limits of Monopoly Price. John A. Hobson .... 420 

D. Types of Unfair Competition 
2og. Competitive Methods in the Tobacco Business. Meyer Jacob- 
stein 423 

210. Competitive Methods in the Cash Register Business. Henry 
Rogers Seager 424 

211. The "Tieing" Agreement. W. H. S. Stevens 426 

212. Monopoly Control of Cost Goods. W. H. S. Stevens . . . 428 

E. The Government and Monopoly 

213. Law and the Forms of Combination. Bruce Wyman . . . 430 

214. The Sherman Anti-Trust Act. United States Statutes . . . 433 

215. The Meaning of Restraint of Trade. United States Supreme Court 434 

216. Dissolution of the Standard Oil Company. H. C. Folger, Jr. . 435 

217. The Result of the Dissolutions. Arthur Jerome Eddy . . . 436 

218. An Appraisal of the Sherman Act. AUyn A. Young . . -437 

219. Provisions of the Clayton Act. W. H. S. Stevens .... 441 

220. The Trade Commission and Clayton Acts. W. H. S. Stevens . 442 

221. Ultimate Results of Regulating Combinations. E. Dana Durand 443 

IX. The Problems of Population 

Introduction 449 

A. The Question of Numbers 

222. Utopia and the Serpent. Thomas Huxley 451 

223. Early Appraisals of Population. An Early Historian, an Early 
• Poet, Aristotle, Sir William Temple, Sir Josiah Child, Daniel 

Defoe, Sir James Steuart, Arthur Young, and Adam Ferguson . 452 

B. The Malthusian Theory 

224. The Social Crisis at the Time of Malthus. Francesco S. Nitti . 455 

225. The Theory of Population. Thomas Robert Malthus . -457 

226. Malthusianism a Support of Capitalism. Piercy Ravenstone . 460 

227. Malthus versus the Malthusians. Leonard T. Hobhouse . .462 



XX CONTENTS 

C. The Coming of the Immigrant 

228. The Falling Birth-Rate. Edward Alsworth Ross 

229. The Immigrant Invasion. Frank Julian Warne 

230. Immigration in a Single Year. F. A! Ogg 

231. American Appraisals of Immigration 

a) The Problem of Distribution. Niks' Register . . , 

b) The Old Immigration and the New. S. F. B. Morse . 

c) Not Wops, but Irishmen. Association on Condition of Poor 

d) Not Like the Old Immigrants. M. D. Lichliter . 

e) Freedom of Opportunity. Henry A. Rodenburg . ' . 



PAGE 

468 
471 
472 
472 
472 

473 
473 
473 



D. Immigration and Industrial Development 

232. Our Industrial Debt to Immigrants. Peter Roberts . . . 474 

233. The Manna of Cheap Labor. Edward Alsworth Ross . . . 476 

E. Immigration and Labor Conditions 

234. Living Conditions among Home Laborers. Charles Dickens . -477 

235. The Standard of Living of the New Immigrants. I. A. Hourwich . 478 

236. Immigration and Wages. LA. Hourwich 480 

237. The Elevation of the Native Laborer. William S. Rossiter . . 482 

238. The Industrial Menace of the Immigrant. Edward Alsworth Ross 484 

239. Immigration and Unionism. W. Jett Lauck .... 488 



F. The Further Restriction of Immigration 

240. The Menace of the Immigrant Farmer. Robert D. Ward 

241. A Protest against Immigration. United Garment Workers 

242. Consular Inspection as a Method of Restriction. Broughton 
Brandenburg 

243. An Immigration Program. The Immigration Conamission 

244. The Pro and Con of the Literacy Test 
o) The Necessity of the Educational Test. P. F. Hall 

b) Pauperism and Illiteracy. Kate H. Claghorn 

c) From the Men at the Gate. Louis S. Amonson . 

d) Our Immigration Policy. Woodrow Wilson . 

245. Wanted — ^An Immigration Policy. New Republic 



489 
490 

490 
492 
493 
493 
494 
495 
495 
496 



G. Immigration and Our Future 

246. The Economics of Immigration. Frank A. Fetter . . . . 499 

247. The Immigrant an Industrial Peasant ? H.G.Wells . . . 501 

248. The Influence of the Immigrant on America. Walter E. Weyl . 503 

H. The Quality of Population 

249. The Breeding of Men. Plato 506 

250. Derby Day and Social Reform. Martin Conway . . , , 507 



CONTENTS xxi 

PAGE 

251. Eugenics and the Social Utopia. George P. Mudge . . . 509 

252. Immigration and Eugenics. Walter E. Weyl 509 

253. The Rationale of Eugenics. James A. Field . . . . .511 

X. The Problems of Economic Insecurity 

Introduction 515 

A. Insecurity under Modern Industrialism 

254. Competition and Personal Insecurity. Thomas Kirkup . . . 517 

255. Machinery and the Demand for Labor. John A. Hobson . . 519 

256. Economic Insecurity and Insurance. William F. Willoughby. . 522 

B. Unemployment 

257. Character and Types of Unemployment. W. H. Beveridge . . 524 

258. Wanted: A Labor Exchange. Gregory Mason . . . .526 

259. Cyclical Distribution of Government Orders. Sidney and Beatrice 
Webb 528 

260. Insurance against Unemployment. W. H. Beveridge . . . 531 

261. An Appraisal of Unemployment Insurance. WiUiam F. Willoughby 533 

C. Industrial Accident 

262. The Machine Process and Industrial Accident. E. H. Downey . 534 

263. Imputation of Responsibility for Accidents. A Railway Company 537 

264. Industrial Accidents and the Theory of Negligence. Lee K. Frankel 

and Miles M. Dawson 538 

265. The Incidence of Work Accidents. E. H. Downey .... 540 

266. The Necessity of Employer's Liability. Adna F. Weber . . 542 

D. Sickness and Old Age 

267. The Industrial Cost of Sickness. Joseph P. Chamberlain . . 543 

268. Why Sickness Insurance Should Be Compulsory. I. M. Rubinow 544 

269. The British National Insurance Bill. Warren S. Thompson . . 546 

270. Old-Age Pensions in New Zealand. W. P. Reeves .... 548 

E. The Standard of Living 

271. The Nature of the Standard of Living. Frank Hatch Streightoff . 550 

272. A Wage-Earner's Budget. Louise Boland More . . . .552 

273. Life at |i . 65 a Day. Margaret F. Byington 554 

274. A "Fair Living Wage." Louise Boland More 557 

F. The Minimum Wage 

275. The Promise of a Minimum Wage. A. N. Holcombe . . . 558 

276. The Case for Wage-Boards. Constance Smith . , . . . 559 



xxu CONTENTS 

PAGE 

277. The Progress of the Minimum Wage. Florence Kelley . . . .562 

278. The FutiHty of the Minimum Wage. J. Laurence Laughlin . . 564 

279. Wage-Settlement by External Authority. S. J. Chapman . . 567 

280. A Minimum Wage for Immigrants. Paul U. Kellogg . . . 569 

G. Compulsory Arbitration and Wages 

281. Arbitration in New Zealand. Hugh H. Lusk . . . . . 571 

282. Compulsory Arbitration in Theory and Practice. James Edward 

le Rossignol and William Downie Stewart 574 

XI. The Problems of Trade Unionism 

Introduction 577 

A. Group and Class Consciousness 

283. Bourgeoisie and Proletariat. Werner Sombart 579 

284. The Historical Basis of Trade Unionism. Sidney and Beatrice 
Webb ^ 581 

285. The Organization of the Ill-paid Classes. Charles H. Cooley . 582 

286. Types of Unionism. Robert F. Hoxie 584 

B. The Viewpoints of Laborer and Capitalist 

287. The Sons of Martha. Rudyard Kipling 588 

288. The Viewpoint of the Trade Unionists. Robert F. Hoxie . . 590 

289. Articles of Faith 594 

a) An Economic Creed. National Association of Manufacturers . 594 

b) A Political Creed. National Association of Manufacturers . 595 

C. Character and Purposes or Trade Unions 

290. The Undemocratic Character of Trade Unions. Charles W. Eliot 596 

291. An Employer's View of Trade Unions. Andrew Carnegie . . 599 

292. The Purposes of Trade Unionism. John Mitchell .... 600 

D. The Theory of Unionism 

293. The Principle of Uniformity. Robert F. Hoxie .... 602 

294. Collective Bargaining and the Trade Agreement. John R. 
Commons 605 

295. The Economics of the Closed Shop. Frank T. Stockton . . 608 

296. The Ethics of the Closed Shop. James H. Tufts . . . ^ . 613 

E. The Weapons of Industrial Conflict 

297. TheFunctionof the Strike in Collective Bargaining. John Mitchell 614 

298. The Utility of the Strike. Frank Julian Warne .... 615 

299. The Striker and the Worker. Solon Lauer 617 

300. Wanted— Jobs Breaking Strikes. Joy Detective Agency . . 618 



CONTENTS xxiii 

PAGE 

301. The Efficacy of Secret Service. William J. Burns Detective 
Agency 618 

302. The Boycott of the Butterick Company. A. J. Portenar . . 618 

303. Ostracism as an Industrial Weapon. Frank Julian Warne . . 620 

304. The Scab. Dyer D. Lum 622 

F. Scientific Management and Unionism 

305. Labor and Efficiency. Frederick W. Taylor 624 

306. The Nature of Scientific Management. Maurice L. Cooke . . 626 

307. The Attitude of Organized Labor toward Scientific Management. 
American Federation of Labor '. . .628 

308. Modern Industry and Craft Skill. International Moulders' Journal 628 

G. Unionism and the Anti-Trust Laws 

309. The Monopoly of Labor. WiUiam H. Taft 630 

310. The Charter of Industrial Freedom. Samuel Gompers . . .632 

311. Legal Exemption of Labor Combinations. Ally n A. Young . . 634 



H. Revolutionary Unionism 

312. Sabotage 

a) A Definition of Sabotage. Arturo M. Giovannitti 

b) Go Cannie. Arturo M. Giovannitti .... 

c) Put Salt in the Sugar. Montpelier Labor Exchange . 

d) The Effectiveness of Sabotage. Arturo M. Giovannitti 

e) The Universality of Sabotage. Industrial Worker 

313. Industrial versus Trade Unionism. Mary K. O'Sullivan 

314. The Standpoint of Syndicalism, Louis Levine . 

315. The General Strike. Arthur D. Lewis .... 



637 
637 
637 
638 

639 
640 
641 
642 
644 



^11. Social Reform and Legal Institutions 

Introduction 647 

A, The Legal System 

316. The Economic Basis of Law. Achille Loria 649 

317. Social Rights and the Legal System. Roscoe Pound . . . . 651 

318. Law and Social Statics. Oliver W. Holmes 654 

319. The Social Function of Law. Homer Hoyt 654 

B. Private Property 

320. The Development of the Right of Property. George B. Newcomb 658 

321. Property and Stewardship. Saint Basil 660 

322. The Ethics of Property. Pierre Joseph Proudhon .... 660 

323. Progress and Property. Paul Elmer More ..... 661 

324. Mine— Property and Rights. David M. Parry .... 664 

325. My Apology. P. Property 666 



xxiv CONTENTS 

C. Industrial Liberty 

PAGE 

326. The Mediatory Character of Freedom. Thomas Hill Green . 669 

327. Contract and Co-operation. Henry Sidgwick 670 

328. Contract and Personal Responsibility. Arthur Twining Hadley . 670 

329. Labor and Freedom of Contract. Chicago Industrial Exhibit . 673 

330. Static Assumptions of Contractual Freedom. Roscoe Pound . 674 

331. Contractual Rights — ^Legal and Real. Thorstein B. Veblen . . 676 

D. The Courts and Labor 

332. Limitation of the Working Day for Women 678 

a) The Supremacy of Freedom of Contract. Illinois Supreme 

Court 678 

h) The Supremacy of the Police Power. Nebraska Supreme Court 679 
c) Maternity and State Regulation. United States Supreme 

Court . . . . . 680 

333. Reciprocal Nature of Employer's and Employee's Rights. United 
States Federal Court .680 

334. The Danbury Hatters' Case. Harry W. Laidler .... 682 

335. A Legal Criticism of the Injunction. Charles Claflin Allen . . 685 

336. Unionism and the Conditions of Employment. United States 
Supreme Court 686 

XIII. Social Reform and Taxation 

Introduction 690 

A. Taxation and Industrial Development 

337. Expenditures and Social Organization. Henry Carter Adams . 692 

338. Taxation as a Means of Social Control. Adolph Wagner . . 693 

339. Taxation and Technical Development. J. R. McCuUoch . . 695 

B. The Theory of Taxation 

340. Canons of Taxation. Adam Smith 696 

341. The Burden of Taxation. S. J. Chapman ...... 697 

C. The Incidence of Taxation 

342. Incidence and Industrial Organization. A. W. Flux . . . 699 

343. The Burden of the Tariff Tax. Liberal Party Pamphlet . . 702 

344. The Incidence of the Customs Tax. Edwin R. A. Seligman . . 704 

D. "Unscientific" Taxation 

345. Defects of the General Property Tax. National Tax Association . 706 

346. Multiple Taxation. Theodore Sutro 708 



CONTENTS 



XXV 



E. Tendencies in Taxation 

PAGE 

347. The Massachusetts Corporation Tax. Commissioner of Corpora- 
tions 710 

348. The Federal Income Tax. Edwin R. A. Seligman . . . 713 

349. Public Capitalization of the Inheritance Tax. Alvin S. Johnson . 717 



F. The Single Tax 

350. The Increase in Land Values 

a) Land Values in the Fifteenth Century. Therold Rogers . 

b) Rents in the Sixteenth Century. Hugh Latimer 

c) The Power of Landlords. Thomas Spence .... 
, d) The Influence of Rent on Trade and Commerce. A. O'Connor 

e) A Land Boom in Iowa. Alfred Russel Wallace . 

/) The Social Importance of Rent. Alfred Russel Wallace . 

g) The Benefits of Improvement. Adolph Wagner . 

351. The Social Injustice of Rent. Henry George .... 

352. The Theoretical Basis of the Single Tax. C. B. FiUebrown . 

353. A Criticism of the Single Tax. Charles J. Bullock . 



720 
720 
721 
721 
721 
722 

723 
724 
724 

725 
726 



XIV. Comprehensive Schemes of Social Reform 
Introduction 728 



A. The Voice of Social Protest 

354. Privilege and Power 

a) Woe to the Idle Rich. Amos .... 

b) The Daughters of Zion. Isaiah 

c) Why the Lords? John Ball .... 

d) Government and Inequality. Sir Thomas More 

e) The Possibilities of Production. Richard Jeffrey 
/) The Beginning of It All. J. J. Rousseau 

355. "Progress and Poverty" 

a) In the Wake of Trade. Oliver Goldsmith 

b) When There Was a Frontier. J. B. McMaster 

c) Labor and Value. Poorman's Guardian 

d) The Poor in Manchester. Frederick Engels 

e) Packingtown as a Residential Section. A. M. Simons 
/) Hallelujah on the Bum. Songs of the Workers 

356. Expanding Wants and Social Unrest. A Cape Cod Fisherman 

B. Individualistic Schemes oe Reform 

357. Scrub-Humanity. Solon Lauer 

358. The Promise of Co-operation. Francis G. Peabody . 

359. "U.S. Steel" and Labor. Ray nal C. Boiling . . . . 

360. Labor and "U.S. Steel." John A. Fitch . . . 



729 
729 
730 
730 
730 
731 
731 
732 
732 
732 
733 
734 
734 
735 
736 

736 

737 
739 
742 



xxvi CONTENTS 

C. The Socialist's Indictment of Capitalism 

PAGE 

361. Marx's Theory of the Development of Capitahsm. Werner 
Sombart 745 

362. The Economic Failure of Capitalism. J. Ramsey Macdonald . 748 

D. The Case for Socialism 

363. The Distinction between Socialism and Communism. M. Tugan- 
Baranowsky 751 

364. The Central Aim of Socialism. Thomas Kirkup . . . -752 

365. Property and Industry under Socialism. John Spargo . . . 754 

E. Socialist Arguments for the Masses 

366. Capitalism — A Vampire System. George E. Littlefield . . . 757 

367. "My Papa Is a Socialist." Harvey P. Moyer 758 

368. The Capitalist's Ten Commandments. W. Willis Harris. . . 759 

369. A Confession of Faith. Progressive Thought 760 

F. Socialist Programs 

370. The National Platform of the Socialist Party . . . . .761 

371. Municipal and State Program. Socialist Campaign Book . . 766 

G. The Case against Socialism 

372. The Transition to the Socialist State. O. D. Skelton . . . 769 
373 Socialism and Inequality. N. G. Pierson 770 

374. Some Objections to Socialism. William Graham .... 773 

375. Socialism and the Factors of Production 774 

H. Social Panaceas 

376. Stable Money and the Future. George H. Shibley .... 777 

377. The Way Out. John Raymond Cummings 778 

378. Universal Federation. King C. Gillette 778 

379. A New Earth. L. G. Chiozza Money 780 

I. Economics and the Future of Society 

380. Wanted: A New Symbolism. Alvin S. Johnson .... 783 

381. The Banquet of Life. William Graham Sumner . . . .785 

382. Progress and Discontent. Thomas Babington Macaulay . . 788 



INTRODUCTION 

I. The Study of Current Economic Problems 

In this day of rapidly changing values, particularly in economic 
life and thought, one cannot publish even so unpretentious a work 
as a book of readings without offering an explanation. The reader 
desires to know the scope of the volume, the principles governing 
the selection and arrangement of the materials which compose it, 
how it is to be used, and the objects which it is supposed to accom- 
plish. In short, he asks for the theory of the book ; and this is the 
purpose of these introductory pages to furnish. 

The title commits the volume to the domain of current economic 
problems ; but currency is not a mere matter of the transitory and 
ephemeral aspects of economic life, such as are noted in the morn- 
ing paper. The most recent industrial merger, the latest bit of 
legislation, the court decision just announced do not mark out its 
province. The economic questions currently discussed and subject 
to immediate political action do not fix its bounds. Such things 
as these, distinct as they seem to be, are mere passing phases of 
larger and more complex problems. For their beginnings we must 
look into the far-distant past; their ends it is not yet vouchsafed 
to us to see. They are in process of gradual solution. The issues 
which they involve are much more intricate and subtle and much 
less comprehensible than their immediate aspects would seem to 
indicate. In form and content each is closely identified with the 
stage of industrial development which we have reached. Each in- 
volves something of almost every phase of our complicated social 
life. As separate problems they are merely aspects of a larger 
reality. If, then, we would understand them aright, we must study 
them in their historical setting as incidents in the development of 
society. 

Their essential unity makes the word problems in the title un- 
fortunate. The term seems to imply the separate treatment of a 
number of loosely connected questions. The editor disclaims such 
pretentiousness in his use of it. He has no intention of presenting 
an aggregation of summaries from many particular fields of eco- 
nomic knowledge. He purports to give no epitome of a dozen different 
volumes discussing as many different problems. In this book he 
can neither make use of the methods, nor accomplish the results, of 
advanced study. A proper understanding of each of these problems 



xxviii INTRODUCTION 

is contingent upon a mastery of the workings of some very intricate 
economic machinery, a careful examination of a large amount of 
factual material, a painstaking analysis and interpretation of the 
phenomena of the field of study, and an elaboration of the con- 
clusions drawn from it. To attempt such a task for each of the 
problems presented here in the space available is impossible; it 
would result in a mere formal presentation of half-truths. The 
object of this volume is of another kind; it is introductory. It at- 
tempts to present a general view of the whole as a necessary pre- 
liminary to a study of particular problems. So far as the latter are 
separately treated, they are presented as aspects of the larger whole. 

A study of problems implies a search for answers. But, if this 
volume is to be judged by its ability to supply the earnest student 
with the right answer to each of the questions it discusses, it must 
indeed be found a dismal failure. The number of problems with 
which it deals precludes the detailed study which should precede 
the formation of "final" opinions. Besides, it is extremely doubtful 
whether the problems of industrial society can be settled dog- 
matically. As economists we can, and should perhaps, dogmatize 
about such principles as "the law of diminishing returns." But no 
economic problem can be resolved by the application of a single 
simple law; it is part of a situation much too complex and subtle 
and peculiar for that. Nor can it be made to yield to the magic 
that lies in a separation of all proposals into the two simple classes 
of the "good" and the "bad." Nor yet can its solution emerge as 
the result of a process of calculating resulting utilities and dis- 
utilities. Every proposal involves a distribution of costs and utilities 
between the present and the future, and between different classes in 
society. It has not one, but many, economic consequences, good 
and bad. It is sure to affect in countless ways, for better or for 
worse, the legal, political, ethical, religious, and social aspects of 
life. There is no magical instrument of measurement which can 
unlock such a riddle by promising that a certain definite surplus 
of good or ill will follow the application of a given proposal. Such 
values are incommensurable by any known instrument of calculation. 

Yet, to make judgments in the face of these complex schemes of 
incommensurable values is the essence of the problems which we 
are to discuss. If their solutions are to be advanced, if industrial 
society is to develop, such judgments must be made. We cannot 
blink the fact that every proposal advanced involves both the good 
and the bad, the desirable and the undesirable. We cannot forget 
that to get some of the good things we want, we must give up other 
good things; that to escape some of the costs we are unwilling to 



INTRODUCTION xxix 

incur, we must endure others. In short, the "solution" of an eco- 
nomic problem involves a choice between conflicting and incom- 
mensurable values. The decision which it requires transcends the 
utmost that can be pent up in any strictly economic terms ; it is 
contingent upon nothing less than our ideal of the socially desirable. 
But, if our efforts are to be effective, we must aim at the attainable. 
We must take full account of the limitations imposed upon the 
"solution" of problems by contemporary activities, prevailing insti- 
tutions, and the attitudes of the various classes which make up 
society. In view of the large economic and intellectual environment 
surrounding them, economic problems are not suddenly to be dis- 
posed of ; definite and final answers are not to be found for them. 
Rather they are gradually to be solved ; they must have everdevelop- 
ing answers. 

Upon this theory of a choice between conflicting and incom- 
mensurable values the readings which follow have been selected. 
They come from the most miscellaneous sources. They represent all 
the prominent attitudes, from the most conservative to the most 
radical, which condition the direction of our development. They 
are written by men possessed of the widest variety of opinion — 
economic, political, and sociological. They represent emotionally as 
well as intellectually (for feelings count as strongly as logic in the 
practical affairs of our everyday world) the conflicting views and 
arguments which contemporary society is bringing to bear upon its 
problems. They contain sound argument, good judgment, truth. 
They contain, too, much of overstatement, fallacious reasoning, and 
falsehood. But all are important for, sound or unsound, true 
or false, they are active elements of the problems we would solve. 
The reader should not too definitely attempt to separate them into 
the "true" and the "false." All thought is conditioned by its funda- 
mental assumptions. Matters of personality, of class, of time, and of 
place manage to make their way into all intellectual work. Those 
who regard themselves as most immune are frequently most subject 
to these disturbing influences. Undoubtedly fundamental differences 
about economic programs frequently grow out of the possession or 
non-possession of the "facts." But far oftener they are due to 
conflicting attitudes which represent endeavors to find social good by 
generalizing individual interests. Some such study is necessary to 
a clear appreciation of the many conflicting values involved in the 
conscious judgments upon which the solution of our problems 
depend. 

In quite another way, the miscellaneous character of these read- 
ings should prove valuable. They should help the reader to approach 



XXX INTRODUCTION 

economic questions without personal or class bias; they should 
lead him to see that his own opinions, despite the authority of their 
source and their venerable age, are not necessarily the expression 
of economic verity ; and they should induce in him some willingness 
to hold in abeyance his judgment on economic questions. Vital and 
valid arguments in support of a proposition in which one thor- 
oughly disbelieves should do much to prevent haste in the formation 
of his final judgments. Even erroneous arguments have their peda- 
gogical value. Stimulation is by provocation as well as by sug- 
gestion; and it is hoped that more than one of the readings which 
follow will provoke the reader into a more careful formulation of 
his opinions and a clearer statement of his reasons for possessing 
them. Above all, it is hoped that in a constructive way they may 
give the beginnings of a flexible and developing economic program. 
Its fulness can, and should, come with time, study, and reflection. 

It cannot be denied that many of the readings touch upon ques- 
tions which many think cannot be discussed without "danger to 
society" ; and that others present views which "threaten to subvert 
our institutions." Fortunately the disposition to exclude "dangerous 
subjects" and "dangerous views" from academic discussion is much 
less pronounced than it used to be. There seems to the editor little 
doubt that the danger is, if not altogether absent, at least unduly 
magnified. To the extent that it is real, however, an injunction 
against discussion is not the proper method of minimizing it. The 
safe course lies rather in getting students to think clearly in terms 
of economic situations and to recognize in this thinking the many 
fundamental economic values which usually fail of popular con- 
sideration. The erection of signs prohibiting trespass is the best 
method of enticing college students into forbidden fields of discus- 
sion. Much better is it to invite to this forbidden territory under 
proper guidance. It is hoped that the selections which follow will 
reveal some of these values and will do something to induce intelli- 
gent thought. 

To the end of showing the setting of our current problems and 
the many conflicting values which they involve, the book has been 
made to consist of a large number of short readings rather than a 
small number of long ones. Whatever may be the value of the 
latter type of manual for advanced work, its usefulness in elementary 
instruction is largely its power of compelling labor. A small number 
of readings cannot at all cover the field adequately; they cannot 
furnish a clear perspective of the subject as a whole; they cannot 
introduce economic problems in their larger setting. They contain 
much extraneous matter; they include discussions of subtle points 



INTRODUCTION xxxi 

lost on all except advanced students ; and they are prone to cause the 
student to lose the main issues in a world of detail. They commit 
the fundamental error of attempting to exhibit the particulars before 
the student has seen the whole. They make it difficult for the 
average student to discriminate between the accidental and the 
essential ; and too frequently their use leads to a substitution of 
heroic clerical work for intellectual exertion. In the readings here 
presented an attempt has been made to eliminate the non-essential 
and the confusing. 

This induced simplicity is not intended to convey the idea that 
the problems involved are simple, and that social economics is a 
subject which can easily be "mastered." On the contrary, few 
teachers will be tempted to charge this volume with an elucidation 
of the merely obvious. On the contrary, the very difficulty of the 
subjects treated makes it necessary that the many and conflicting 
arguments be presented as simply and definitely as possible. One 
of the functions of the book is to show the difficulty and complexity 
of the problems. Perhaps nothing is doing more to complicate the 
solution of our problems at the present time and to prevent the 
elaboration of a definite program than the belief of so many people 
that these same problems are simple and easily understood, and 
that "evils" are responsive to simple prescriptions. To convey the 
idea of simplicity and intelligibility, when these are not of the sub- 
ject discussed, is to fail on the very threshold of economic study. 

In an introductory course, the primary desideratum is not the 
acquisition by the student of facts and formulas, which he can hand 
back at examination, having no further use for them. It is rather 
to induce on his part a developing appreciation of the situation as 
a whole and of the relation of institutions and problems to each other 
and to it. It is more desirable that he come to understand the sub- 
ject than that he amass formal knowledge about it. It is preferable 
that he learn to think intelligently in terms of a complex industrial 
situation than that he acquire a vast collection of "principles" that 
formally explain its working. The readings are intended to supply 
not factual material upon which the student can be quizzed, but 
rather matter that will raise questions and provoke thought. They 
are intended to prepare for recitation by giving the instructor and 
the students something to discuss together. The function of the 
instructor is to direct and guide the discussion, and to see that the 
thought of the students is intelligent and intelligible. 

It is no part of the function of this volume, therefore, to lighten 
the instructor's labors. Ease and a shifting of responsibility can 
better be found in the formal lecture or in quizzing from a text. The 



XXX INTRODUCTION 

economic questions without personal or class bias ; they should 
lead him to see that his own opinions, despite the authority of their 
source and their venerable age, are not necessarily the expression 
of economic verity ; and they should induce in him some willingness 
to hold in abeyance his judgment on economic questions. Vital and 
valid arguments in support of a proposition in which one thor- 
oughly disbelieves should do much to prevent haste in the formation 
of his final judgments. Even erroneous arguments have their peda- 
gogical value. Stimulation is by provocation as well as by sug- 
gestion; and it is hoped that more than one of the readings which 
follow will provoke the reader into a more careful formulation of 
his opinions and a clearer statement of his reasons for possessing 
them. Above all, it is hoped that in a constructive way they may 
give the beginnings of a flexible and developing economic program. 
Its fulness can, and should, come with time, study, and reflection. 

It cannot be denied that many of the readings touch upon ques- 
tions which many think cannot be discussed without "danger to 
society" ; and that others present views which "threaten to subvert 
our institutions." Fortunately the disposition to exclude "dangerous 
subjects" and "dangerous views" from academic discussion is much 
less pronounced than it used to be. There seems to the editor little 
doubt that the danger is, if not altogether absent, at least unduly 
magnified. To the extent that it is real, however, an injunction 
against discussion is not the proper method of minimizing it. The 
safe course lies rather in getting students to think clearly in terms 
of economic situations and to recognize in this thinking the many 
fundamental economic values which usually fail of popular con- 
sideration. The erection of signs prohibiting trespass is the best 
method of enticing college students into forbidden fields of discus- 
sion. Much better is it to invite to this forbidden territory under 
proper guidance. It is hoped that the selections which follow will 
reveal some of these values and will do something to induce intelli- 
gent thought. 

To the end of showing the setting of our current problems and 
the many conflicting values which they involve, the book has been 
made to consist of a large number of short readings rather than a 
small number of long ones. Whatever may be the value of the 
latter type of manual for advanced work, its usefulness in elementary 
instruction is largely its power of compelling labor. A small number 
of readings cannot at all cover the field adequately; they cannot 
furnish a clear perspective of the subject as a whole; they cannot 
introduce economic problems in their larger setting. They contain 
much extraneous matter; they include discussions of subtle points 



INTRODUCTION xxxi 

'lost on all except advanced students ; and they are prone to cause the 
student to lose the main issues in a world of detail. They commit 
the fundamental error of attempting to exhibit the particulars before 
the student has seen the whole. They make it difficult for the 
average student to discriminate between the accidental and the 
essential ; and too frequently their use leads to a substitution of 
heroic clerical work for intellectual exertion. In the readings here 
presented an attempt has been made to eliminate the non-essential 
and the confusing. 

This induced simplicity is not intended to convey the idea that 
the problems involved are simple, and that social economics is a 
subject which can easily be "mastered." On the contrary, few 
teachers will be tempted to charge this volume with an elucidation 
of the merely obvious. On the contrary, the very difficulty of the 
subjects treated makes it necessary that the many and conflicting 
arguments be presented as simply and definitely as possible. One 
of the functions of the book is to show the difficulty and complexity 
of the problems. Perhaps nothing is doing more to complicate the 
solution of our problems at the present time and to prevent the 
elaboration of a definite program than the belief of so many people 
that these same problems are simple and easily understood, and 
that "evils" are responsive to simple prescriptions. To convey the 
idea of simplicity and intelligibility, when these are not of the sub- 
ject discussed, is to fail on the very threshold of economic study. 

In an introductory course, the primary desideratum is not the 
acquisition by the student of facts and formulas, which he can hand 
back at examination, having no further use for them. It is rathei" 
to induce on his part a developing appreciation of the situation as 
a whole and of the relation of institutions and problems to each other 
and to it. It is more desirable that he come to understand the sub- 
ject than that he amass formal knowledge about it. It is preferable 
that he learn to think intelligently in terms of a complex industrial 
situation than that he acquire a vast collection of "principles" that 
formally explain its working. The readings are intended to supply 
not factual material upon which the student can be quizzed, but 
rather matter that will raise questions and provoke thought. They 
are intended to prepare for recitation by giving the instructor and 
the students something to discuss together. The function of the 
instructor is to direct and guide the discussion, and to see that the 
thought of the students is intelligent and intelligible. 

It is no part of the function of this volume, therefore, to lighten 
the instructor's labors. Ease and a shifting of responsibility can 
better be found in the formal lecture or in quizzing from a text. The 



xxxii INTRODUCTION 

editor believes quite firmly that the value of any course in economics 
is pretty much what the instructor makes it. He is the factor of 
vital importance. If the course is to be successful in aiding the 
student properly to begin the long-to-be-continued process ,of getting 
a fair conception of the economic world and of formulating an 
economic program, it must be the instructor's own course. He alone 
knows the factors involved in his own classroom problem. He 
must determine its content, fix its arrangement, and shape the tools 
which he uses to its peculiar need. Books, problems, and other 
pedagogical devices are at best but instruments. If a book of this 
kind has any advantage over a formal text, it is in the freedom which 
it allows to instructor and student, both in making the most of the 
recitation and in the ordering of the course. Wherever it is used, 
unity must come, not from the book itself, but from the teacher's 
own plan, and from his skilful use of the complementary tools he 
employs. The function of this volume is to give not leisure, but 
intellectual liberty. 

2. Economic Problems as Aspects of Social Development 

It is in the economic world of here and now that we are inter- 
ested. Amid its complex of activities, institutions, conventions, 
ideals, standards, and modes of thought we order' our lives. Its 
multifarious and baffling problems are our problems — ours to 
"muddle" or to "solve." How we handle them will determine quite 
largely what the economic world of tomorrow is to be like. For 
these problems are aspects of our industrial system; they are inci- 
dents in the development of our economic society. They emerge,, 
or assume new forms, as the larger whole develops. With its onward 
sweep severally they pass into oblivion, lose themselves in new 
problems, assume unfamiliar forms, or otherwise manage to get 
"solved." They are not distinct things ; they cannot be detached 
from the larger scheme of affairs to which they belong. They 
cannot be disposed of in isolation, as if the universe were one thing 
and each of them another. They are intimately associated with 
each other, with the economic system to which they belong, and with 
the larger world, which includes the legal, political, ethical, social, 
and all other aspects of life economic and non-economic. To under- 
stand them aright we must know something of this larger whole in 
its current manifestations. 

In its rapid development our society is approaching the end of 
what, in no invidious sense, we may call the exploitative period. Our 
development in the nineteenth century was dominated by our stores 



INTRODUCTION xxxiii 

of natural wealth and by the use of an expanding and developing 
machine technique. The century witnessed the conquest of a con- 
tinent, seemingly possessed of never-failing resources. The gifts 
of forest, waterfall, stream, soil and mine, by the magic touch of 
modern technique, were transformed into a golden stream of wealth. 
The expanding system absorbed larger and larger volumes of capital 
and increment after increment of alien labor. Its object and end was 
prosperity. 

This process of getting rich absorbed quite largely our attention 
and our energy. Our thought was for virgin fields for machine 
effort. Our impatience was at the slowness of our very rapid in- 
dustrial development. Our powers of control, so far as they were 
consciously used, were aimed at speeding up. We made no in- 
quisitive search into our legal arrangements, our fundamental 
institutions, or our ethical standards. We did not perceive that 
development in one aspect of life leaves incompatibilities that need 
attention. It did not readily occur to us that improvement should 
occur elsewhere than in the technique of production, the growth 
of business organization, and the expansion of the pecuniary system. 
In short, we neither tried to discover, nor succeeded in discovering, 
society. We had problems, of course — many more than we had 
need for. But they were concerned with removing the barriers 
that opposed the establishment of a pecuniary system on a nation- 
wide plan. 

This neglect of the non-industrial side of life expressed itself 
most conspicuously in a formidable and overgrowti individualism. 
Since we were growing wealthy, all was well. We rarely thought 
of attributing responsibility for what we did not like to society, in- 
stitutions, conditions, or environment. Quite as rarely did we 
attribute prosperity to the abundance of our natural resources. We 
firmly believed that each individual "was master of his fate" ; that 
"opportunity knocks once at every gate" ; that "there is plenty of 
room at the top" ; and that successful men are "self-made." 

This habit of thought worked its way into the whole range of our 
institutions. A fundamental assumption of individualism was that 
all men were equal. A resulting principle of action was that the 
state should give "equal rights to all, and special privileges to none." 
Equality suggested the attainment of political wisdom by calculation. 
Accordingly the object of legislation was "the greatest good to the 
greatest number." Since each person possessed one, and only one, 
vote, it was evident that our government was a democracy. In 
ethics our conduct was measured by individualistic standards. In 
education, by setting up the system of free electives, we made the 



xxxiv INTRODUCTION 

individual student the best judge of the training that was good 
for him. In economics our attention was given very largely to the 
market; the distribution of wealth and proposals of social reform 
were alike treated as if they were mere questions of value theory; 
and we elaborated and generally accepted the doctrine that one 
"gets what he produces." Even our religious systems were char- 
acterized by an intense and dogmatic individualism. 

It was, perhaps, inevitable that we should not escape looking at 
things too narrowly. We manifested a contempt for philosophy 
and general theory. We encouraged specialization, but overlooked 
the broad and general training which should underlie it. We in- 
vestigated particular subjects without knowing the general fields to 
which they belonged. We attempted to resolve phenomena into 
general schemes without understanding the laws which govern the 
phenomena. We formulated, analyzed, and attempted to solve our 
problems as if they were so many distinct entities. We saw the 
whole only as an aggregation of parts, and society only as a collec- 
tion of individuals. 

Closely associated was a notion of social change in mechanical 
terms. When we became impatient with this or that, we demanded 
an immediate remedy. We turned to the state as the obvious agent, 
one which we professed to distrust, and demanded legislation. If 
our attention was not distracted by some new "abuse," we usually 
turned out the party in power if immediate results were not forth- 
coming. Even our reformers usually gave us panaceas for all social 
ills, or demanded a reconstruction of the whole scheme of life. 

Many of our highest social values are associated with individual- 
ism. Its note must be retained to keep the system from being re- 
solved into an orderly, mechanical, prosaic, and dull scheme of 
things. Without it, it is hard to see how society can most fully 
utilize its capacity for development. In the America of the nine- 
teenth century it helped to solve the problems of a young society 
as perhaps nothing else could have done. The individual pluck, 
energy, and initiative which it called forth were just the qualities 
necessary to the gigantic and crude stage of development through 
which the country was passing. It remains in the present, however, 
in a very dominant form, thoroughly ingrained in our institutions 
and in the social philosophy of classes which occupy quite important 
positions in society. 

But for some time we have been conscious that we are approach- 
ing the end of this exploitative period. We have by no means reached 
the end of our resources ; but we have come to see that they are no 
longer boundless. It is evident that there is real danger of wasting 



INTRODUCTION xxxv 

our patrimony. Opportunities for sudden wealth are no longer 
plentiful. We have awakened to the necessity of economy, of giving 
long and careful thought to our social arrangements. We are 
beginning to find out, too, that our prosperity has entailed its costs. 
We gave conscious thought to securing a well-developed machine- 
system, a large population, and a large measure of individual liberty, 
believing that these would bless us with wealth. We succeeded in 
securing these things. But we neglected, to take thought for the 
cultural incidence of the industrial system. As a result we have 
acquired a number of things for which we did not ask, that may 
well be considered the costs of our material progress. Our urban 
life has its full complement of slums, overcrowding, vice and 
poverty. There is clearly evident a tendency toward a stratification 
of society on a pecuniary basis, with a funded-income class at the 
top and a proletariat of alien blood at the bottom. There is growing 
a spirit of protest based upon a philosophy quite foreign to that 
which underlies our cherished institutions. Our vast pecuniary 
system is making the lot of labor, and capital, too, for that matter, 
extremely insecure. Moreover, we are beginning to see that our 
prosperity is imposing its costs upon the next generation, in condi- 
tions and institutions which we did not will, in problems which we 
helped to raise but cannot solve, and in depleted resources with which 
to work out its social salvation. 

As we realize these things, there grows up among us a reaction 
against the extreme individualism of the nineteenth century. We 
are imposing limitations upon what we conceive individual initiative 
and energy to be capable of accomplishing; we doubt if the ladder 
which leads to the top has its full number of rungs ; all successful 
men are no longer "self-made." We occasionally even make excuses 
for the man who fails. We have discovered "environment," and 
speak quite frequently of "exceptional opportunities," "social con- 
ditions," and the "favor of fortune." We are beginning to associate 
those things which we do not like with an "overdeveloped individual- 
ism," and to see "grave dangers" in unrestricted liberty. 

This change is manifesting itself in a changed attitude toward 
our institutions. Quite frequently we use the word "privilege" in 
connection with the activities of government. Seemingly forgetful 
of our former boasts, we are today demanding reforms which will 
make our government "democratic." We are not distrustful of the 
fundamental soundness of our legal institutions, such as property, 
contract, equality before the law, etc., but we are beginning to sus- 
pect that they bear too many signs of having been forged to meet 



xxxvi INTRODUCTION 

the needs of frontier and craft societies ; that they are more con- 
sonant with the plow and the spinning-wheel than with the power- 
loom and the locomotive. We are qualifying ethical standards which 
we regard as vdlid with the adjective social. In education the elective 
system is giving way to a flexible curriculum adapted to the newer 
society. A spirit of group and class welfare is expressing itself in 
such voluntary associations as the trade and craft unions, and is 
beginning to permeate legislation. We are beginning to trust the 
state, and are no longer affrighted by the cry of paternalism. In 
economics we use the term "social value" ; we have begun to insist 
that economic theory is not confined to value theory; and we are 
more clearly recognizing that distribution of wealth and projects 
of social reform are concerned with institutional arrangements. Our 
religious systems are more and more emphasizing the note of 
"social service." 

With the reaction from individualism has come a protest against 
our habit of considering the particular apart from the general. We 
are beginning to learn that things in general matter; and that the 
reality of our problems lies in their connection Avith social life in 
its varied and multifarious aspects. We are realizing that specializa- 
tion, to be anything more than clerical, must have a broad basis. 
We are coming to see that the whole is something quite different 
from the sum of its parts; that society is not a mere aggregation 
of individuals; 

Quite naturally enough the impatience that comes from the newer 
view of things has enough of the older thought in it to place great 
reliance in mechanics. It wants results and wants them now. In- 
stinctively it turns to the state and demands legislation. But, in spite 
of that, we are surely, if slowly, learning that there are decided 
limitations upon what can be accomplished by tinkering. We know 
that laws must be passed, and that there are many things which 
immediately they can be made to do. But we are beginning to under- 
stand that in many cases they produce their results, not from their 
direct enforcement, but from a series of reactions which they start, 
and these results can only gradually appear. We are learning, too, 
that there are other and more delicate instruments of control, such 
as the educational system, codes of professional ethics, occupational 
associations, and even conventions and traditions, that we may use 
in the furtherance of our schemes, and that these delicate instru- 
ments will reach many things too subtle and too minute to be touched 
by the bolder and cruder machinery of the state. 

In view of this it is not surprising that we are at last learning 
that we do not have to be forever in a hurry. We must pay for 
what we get. Perfect societies are not El Dorados or Klondikes to 



INTRODUCTION xxxvii 

be stumbled upon. A Utopia, even if it can be realized, cannot be 
juggled out of a hat by a social magician. We must through devel- 
opment gradually assume the social form we desire. Only knowl- 
edge is obtained; wisdom is attained. Even our socialists, who, 
only yesterday, were promising us "a new heaven and a new earth," 
have learned that there is a tomorrow. 

And withal, in our radicalism, if you choose to call it such, we 
are becoming more conservative. If we have begun to ask imperti- 
nent questions about classes, property, and social arrangements 
generally, it is not because we are condemning, but only because 
we are socially inquisitive. We would prove all things in order that 
we may hold fast to that which is good. Yet more clearly than 
ever before we realize the vastness, complexity, and even the mys- 
teriousness of our social system. We know that we understand how 
various institutions and agents work very imperfectly. We know 
that many that seem to us to be without responsibility are intimately 
associated with some very important functions. We are not quite 
sure that we could create agencies which would perform the same 
functions more efficiently or with less cost. These things incline 
us to caution, to take easy steps, to examine results carefully before 
proceeding, and to use very flexible programs. But, if our knowl- 
edge is small, and if the difficulties are great, the call is for a greater 
determination, a more farsighted vision, a more careful, comprehen- 
sive, and patient study, and greater deliberation about ways and 
means. 

In view of this particular crisis in our development we must 
consider our problems. We must recognize the part which the 
older society, the older institutional system, and the older individ- 
ualistic thought have played and are still playing. We must as 
clearly recognize the newer tendencies, both in the institutional sys- 
tem and in the newer attitudes toward our economic arrangements. 
Many of these problems we shall find to be old. When the universe • 
was contrived many antagonisms were left. The enigmas of rich 
and poor, of waste and poverty, of privilege and oppression, have 
been presented to us by the many ages which they have baffled. As 
likely as not we shall leave them as part of our heritage to succeeding 
generations. Some of them appeared with the machine-system, and 
have become more and more conspicuous as the newer technique 
conquered the continent. Of these are the problems connected with 
huge aggregates of wealth, such as railroads and capitalistic monop- 
olies. Some come from incompatibilities between advancing and 
stationary aspects of social development. The legal problem in- 
volved in employer's liability is typical of this class. Some are 



xxxvm INTRODUCTION 

manifestations of a later stage of the machine-culture. Of this kind 
are the problems centering in institutional system which trade union- 
ism threatens to create. Of some of these problems we have long 
been conscious. The change in our attitude toward our social 
system has brought others within our field of vision. Who knows 
but there are many others which are with us, but which we cannot 
see because of intellectual blindness? But, old or new, familiar or 
unfamiliar, evident or invisible, all of these problems are part and 
parcel of Modern Industrialism. They are all involved in the gigan- 
tic pecuniary system which knits together our social life. The oldest 
of them is with us a problem very different in form from its earlier 
prototype which confronted our ancestors. They are all aspects of 
the larger question, Can our society determine the direction of its 
own development? 

To find an answer to such a question would involve a quest into 
all of life. Here we must modestly limit ourselves to a general 
survey of the current aspects of Modern Industrialism. Our pro- 
cedure makes it imperative, first of all, clearly to realize that our 
system is developing and that in this development the various as- 
pects of social life mutually influence each other. The Industrial 
Revolution, if broadly enough interpreted, can then be made to 
show us the peculiarities and problems of the stage in development 
which we have now reached. We can then quite definitely turn our 
attention to the problem of the control of the development of indus- 
trial society, by inquiring about our knowledge of the "forces" which 
cause development, the means of control we possess, and the theory 
of control of which we should make use. The partial control which 
we are to exercise over development is to come from our handling 
of particular problems. Accordingly we must next consider a 
number of somewhat different problems, always with a clear idea 
of their relations to each other and to the developing whole. The 
few which will be treated are typical of the many which confront 
us. These fall into two somewhat distinct groups, the first centering 
about the problem of the organization of industrial society, the 
second concerning themselves with the various industrial classes 
which make up the population. 

The primary question in the first group is that of the mechanical 
perfection with which price organizes society. The problem is com- 
plicated by the rhythm of the business cycle. Associated with it is 
the more difficult question of whether such an organization, quite 
apart from its mechanical perfection, can be made to serve the ends 
we would have it serve. A parallel problem is that of the extent 
to which the economic entity should be made to correspond to the 



INTRODUCTION xxxix 

political entity ; this appears most clearly in the issues which center 
in the tariff. Internal problems of organization, of tremendous 
social consequence, particularly in the tendencies implicit in their 
gradual solution, are found in the regulation of railroads and capi- 
talistic monopolies. 

Of the second group of problems, perhaps the most compre- 
hensive is that of the control of population, quantitatively and 
qualitatively, through immigration and through births. Its proper 
solution should do much to lessen the intensity of the other social 
problems. A second, somewhat less baffling, but still extremely 
difficult, is that of eliminating economic insecurity from the lot of 
the wage-worker. A third, perhaps most evident in the program of 
trade unionism, is concerned with the rise of group- and class- 
consciousness, the spirit of group solidarity implicit in so much of 
the recent social legislation, and the clash between the institutional 
systems of individualism and of collectivism. The progress implicit 
in a solution of these latter problems calls for an increase of state 
activity on behalf of the individual, and makes imperative the 
problem of finding new sources of revenue. And finally, whether 
ominous or prophetic, we need to note a rising spirit of protest 
which demands a radical reconstruction of our whole scheme of 
social life and values. 

Such a quest promises no guaranteed solutions of perplexing 
problems. It will not yield magical formulas for disposing of the 
enigmas which have perplexed the generations. It will give no 
assurance that succeeding ages will have no baffling and bewildering 
questions to disturb their peaceful repose. It will furnish no open 
sesame to a social Utopia. On the contrary, quite likely it will 
show that the perfect society is far in the future. It may even 
convey the dismal lesson that our limited resources will ever prevent 
the emancipation of the sons of Adam from bondage to social econ- 
omy. But the search should yield some positive results. It should, 
put us in position to essay further quests into particular aspects of 
our industrial system. It should prevent our dissipating our energies 
in an attempt to realize the unattainable by impossible methods. It 
should save us from thraldom to social and economic alchemy. Even 
more important, it should show us that our problems are in process 
of gradual solution ; that they have long-time aspects much more 
important than the immediate issues which we see ; and that vision, 
as well as emotion, is called for in dealing with them. Here and 
there, too, we should pick up bits which together we can weave 
into a partial and tentative program. If our quest makes this be- 
ginning, it will have served its purpose. 



THE ANTECEDENTS OF MODERN INDUSTRIALISM 

The perplexing economic questions of the day, as we shall learn, are not 
simple little affairs which can be separated from the "prevailing system" and 
analyzed and "solved" in isolation. They are so closely related that a change 
in one affects many others. They are inseparable parts of that complex of 
institutions, traditions, conventions, and activities to which we attach the 
name Modern Industrialism, and they are intimately associated with the multi- 
farious legal, political, economic, ethical, and social aspects of this larger 
system. It is, therefore, in view of this larger whole that our problems are 
what they are. 

There is nothing singular in our possession of troublesome problems. 
They are the common heritage of the ages. When the universe was con- 
trived enough of antagonism was left in it to keep some problems constantly 
before us. The sweep of change constantly adds new recruits to this array. 
It may be that somehow or other problems get "solved" it may be that they 
merely become obsolescent and, like old machinery, are "scrapped" ; it may be 
that they are forced to surrender their places to newcomers ; or it may be that 
they tend to lose their identity in that of other problems. Perhaps all of these 
things happen; but, however that may be, old problems tend to disappear. 
But, strangely or naturally enough, as you may choose to view it, we never 
have an end of problems. As old ones depart, new ones, without awaiting 
welcome, come forward. Some of these newcomers are old problems appear- 
ing in new forms ; for, after all, there is much that is fundamental in life and 
institutions. The questions of efficiency, of poverty, of social classes, and of 
work and reward are as old as society. But some problems are new ; and 
even the old ones are for us quite distinct from their predecessors — distinct 
in the economic status of the individuals affected, distinct in the scheme of 
values surrounding them, and distinct in the treatment for which they call. 

All of these problems, old and new alike, are aspects of the development 
of society ; they emerge or assume new forms as the social complex de- 
velops. They give evidence of a lack of compatibility somewhere between 
.the many and various aspects of social life — between institution and institu- 
tion, between activity and custom, between practice and ideal. Their con- 
scious — or unconscious — solution is nothing else than a restoration of har- 
mony between antagonistic elements. Since, too, growth is not uniform, their 
passing leads usually to the rise of new problems. Their "solution" has the 
further effect of contributing to the development of society ; the process is 
advanced. 

If, then, we are properly to understand current problems, we must first 
of all get some impression of our present "system." It is so much a part of 
our very lives and activities that we find it hard to think of it as "a" system, 
and are prone to view it as a part of the immutable universe itself. And, 
when active intellectual effort does point it out as only one of many systems, 
we often fail to see that it is in process of constant change. Clearly to under- 
stand — rather than to know — that it is only one among many possible systems 
and to see that it is persistently changing, even as we view it, let us try to catch a 
glimpse of it in process of development. In such a task we need neither gen- 
eral statements of the nature of its growth nor an intensive study of the 
"facts." Our concern is not with the past, but with the present ; our interest 
is not in "events," but in the process. We want to see a system very unlike 
ours slowly giving way to the one with which we are familiar. 



2 CURRENT ECONOMIC PROBLEMS 

To that end we begin, in the readings below, with a consideration of the 
peculiar characteristics of the social "order" with which we are familiar. 
Among these its unity and the interdependence of its aspects are emphasized. 
For example, the influence of the ideals of the mediaeval church upon indus- 
trial development suggests many phases of this interdependence. The selec- 
tions which follow on manorial and gild economy furnish material for a com- 
parison of the spirit, values, activities, and institutions of our present system 
with others quite unlike it. Additional material for the same purpose is 
available in the selections devoted to mediaeval commercial development, pol- 
icy, and theory. The readings also show that there is much in common 
between the social and industrial life of mediaevalism and the nineteenth 
century. The theory of the stewardship of wealth is to be found in modern 
sociology as well as in mediaeval theology; Italy in the fourteenth century 
faced many urban problems which are quite modern ; the mediaeval artisan 
was familiar with the art of "soldiering" ; few moderns could teach many new 
tricks of trade to the mediaeval craftsman ; and there is much of modern 
plausibility in the mercantilist confusion of personal gain and social good. 

Quite as important is the evidence furnished by these readings of a move- 
ment toward the "modern" system. The very ideals of an unworldly church 
were leading toward a material and humanistic culture; priestly inhibitions 
of usury, reinforced by superstitious stories of the torment in store for the 
money-lender, were increasingly impotent to remove the lure of jingling 
guineas promised by commercial ventures ; the manor, a miniature world in 
itself, was losing its identity, and the gild was breaking down in the face of a 
wider and wider organization of industry; the commercial note of pecuniary 
profit was becoming more and more dominant ; and the larger society was 
substituting the magic of price for personal relation as the means of organiza- 
tion. Developing society, at first unlike ours, was coming nearer and nearer 
to the system we know. Only the single movement of the Industrial Revolu- 
tion was necessary to make it assume the form with which we are so familiar. 



A. IDEALS UNDERLYING INDUSTRIAL DEVELOP- 
MENT 

I. The Essential Characteristics of Modern Industrialism 

An understanding of the nature of Modern Industrialism is es- 
sential to an intelligent grasp of its problems and a rational attempt 
at their solution. Such an understanding comes most easily from 
a study of the process by which modern industrial culture has come 
to be what it is. Like all historical work of value, such a study 
must have a definite goal before it. It must aim to reveal those 
institutions, those intellectual and emotional forces, which have 
given character to the prevailing system, which are responsible for 
its problems, and which condition their solution. For that reason 
it is best to begin the historical account of modern culture with a 
brief statement of its essential characteristics. 

Modern Industrialism is a peculiar culture; it is a thing apart. 
Nothing like it has previously existed. The Chinese system of the 
Far East, clinging tenaciously to the past, has developed a system 
which is a sprawling, conglomerate fact. The nearer Orient, India, 



ANTECEDENTS OF INDUSTRIALISM 3 

for instance, has repressed self-assertion, has subordinated the ma- 
terial side of social life, and has produced, as if from a mould, a 
rigidly hard social system. Even the European states of the ancient 
world failed to organize themselves as industrial and social wholes. 
For example, the Greeks showed nowhere their inability at organ- 
ization more clearly than in failing to associate the individual's gain 
from his labor wath a service to a larger group. The unity achieved 
by Rome was a mechanical, not an organic, unity. Both alike 
despised manual labor, and, for that reason, failed to lay an ade- 
quate foundation for a permanent industrial system. How distinct 
is Modern Industrialism is revealed by a brief citation of some of 
its peculiar aspects. The list mentioned below is not intended to be 
all comprehensive and the characteristics mutually exclusive. It is 
merely a statement of some of the charactertistics of our system 
which the student of current economic problems should keep clearly 
in mind. 

First, America and Western Europe, Christendom, in fact, con- 
stitutes a single industrial society. Differences in race, language, 
government, and religious creed are almost negligible in comparison 
with what the Western World has in common. Even where these 
differences exist, the basic elements of these institutions are much 
the same. As ideal or actuality universality has long been a char- 
acteristic of the system. The Roman Empire was universal. When 
the earthly society disintegrated, it remained in idea as a universal, 
heavenly ' kingdom. The Catholic Church, patterned after this 
heavenly society, kept the ideal alive when more substantial unity 
was impossible. Towards the realization of universality society 
tended to be organized in the Catholic Church. And, at last, when 
the spell of Catholicism was broken, political, social, and particularly 
industrial and commercial institutions had tied the Western World 
together into a single industrial culture. 

^ Second, Western Civilization is an extremely fluid culture. Few 
legal and authoritative restrictions are placed upon one's right to 
choose his own occupation. There are no hard and fast class lines. 
In the thought of the people there are practically none. Freedom 
of movement from place tO' place is allowed. In all of life's relations 
there is such fluidity that the adaptation of population, natural re- 
sources, and acquired capital to each other and to changed condi- 
tions is not only rapid, but is constantly in process. Briefly, Chris- 
tian teaching, the presence of the opportunities afforded by the 
American continent, and the Industrial Revolution, have all empha- 

. sized this characteristic. 



4 CURRENT ECONOMIC PROBLEMS 

Third, ours is a humanistic and a material culture. A contempt 
for human life and the material means to well-being, a denial "of the 
world, the llesh, and the devil," a desire to escape from "the vain 
pomp and glory of the world," has never been an essential part of 
the attitude of Western peoples tow^ards life. Even monasticism 
came to be based upon the theory that life in this world is worth 
while. This institution became a means through which other-world 
obligations, placed upon man by the peculiar conditions accompany- 
ing the disintegration of Roman society, could be vicariously satis- 
fied by a small part of society, and the greater part could be released 
to live the better life of the world. INIen who fen'ently sing, "For 
such a worm as I," and "This world's a wilderness of woe, This 
world is not my home," do not discover new continents, invent print- 
ing and the steam-engine, and erect world-wide industrial systems. 
Unlike Greeks and Romans, with us the idea of the worthwhileness 
of life has carried with it the idea of the disiiitv of manual toil, 
which has funiished an adequate foundation upon which to build 
an industrial culture. 

Fourth, our culture is in a very high degree a pecuniary culture. 
J\Iore than by any one thing our economic conduct is actuated by 
the desire for pecuniary profit, ^^'e g"o into those occupations prom- 
ising the highest pecuniar}- returns. Our capital breaks over na- 
tional barriers when the rate of interest abroad mounts higher. 
Even back in the Middle Ages, penaiice, a sacrament of the church, 
was put on a pecuniar}- basis. Escape from the consequences of 
certain actions was allowed to those who had accumulated wealth. 
Thus the accumulation of wealth and the stratification of society 
upon a pecuniar}- basis ^^as encouraged. Today in the court, in 
the church, in the press, in social circles, the man of Avealth is 
treated with greater consideration because of his wealth. The 
three characteristics mentioned above, fluidity, humanism, and the 
dominance of the pecuniary motive have made our culture a highh' 
industrial culture, for it is in industry that these motives find their 
fullest expression. 
X Fifth, our culture places the value of human actions and insti- 

tutions in some end or institution over and beyond themselves. The 
justification of individual activity is not to be found in personal 
good. The actions of individuals are found worthy of praise only 
because of a larger and a greater "society," towards which they are 
as means to an end. Laissez-faire is defended not as a means to 
self-aggrandizement, but as a theory of social welfare. "Big busi- 
ness" talks in tenus of "pay envelopes," "full dinner pails," and 
"general prosperity." But the end from which the value conies is 



ANTECEDENTS OF INDUSTRIALISM 5 

even less immediate than present society. The justification of the 
present is in the future. Back in the Middle Ages one's conduct 
was regulated by one's desire for his "soul's salvation." As men 
little by little ceased to have souls, and "life's fullness" came more 
and more to be recognized as life's end, the emphasis formerly 
attached to the other world associated itself with an ideal society 
which was striving for realization in the church. Even today, ob- 
scured as it may seem, an ideal future society is the potent force 
in evaluating conduct, individual and social. How potent is this 
idea of the future a few statements will show. We use "round- 
about" processes of production. In legislation we seek to conserve 
the interests of capital, future goods, rather than give our atten- 
tion to conserving immediate income. We speak in terms of pro- 
gress and evolution. We condemn, as never before, industry and 
politics because of its "shortsightedness." We give serious consid- 
eration to such a radical program of industrial reform as socialism. 
The value of the present thing is in large part a value derived from 
a future ideal. Thus a spirit of idealism, seeing a realization of its 
purposes in a less immediate society is a very vital factor in deter- 
mining the course of industrial development. 

These several characteristics, material and emotional as all of 
them are, are vital, because they underlie our culture, condition our 
growth, and must be-'clearly recognized in any program of political, 
social, and industrial reform. \ 

2, Christian Teaching and Industrial Development^ 

BY WILLIAM CUNNINGHAM 

The debt of Christendom to ancient Rome is very deep, and cen- 
turies of gradual growth were required before mediaeval could vie 
with ancient civilization in the external signs of material prosperity ; 
but it would be a mistake to suppose that the new society was a 
mere reproduction of the old; it differed in every single feature. 
The contrast between the Roman Empire and mediaeval Christendom 
was a difference not in skill or in organization merely, but in the 
whole spirit of the civilization. Though this element is very im- 
portant it is so subtle that analysis does not readily detect it ; but 
the best that the Greeks had attained may be taken as the starting 
point from which the new advance began. The Greek regarded 
material wealth as a means to an end, and as offering opportunities 

^Adaoted from An Essay on Western Civilisation in Its Economic 
Aspects, II, 6-10, 35-36 (1900). 



6 CURRENT ECONOMIC PROBLEMS 

for the cultured life of free men in a City-State. A high respect 
for the dignity of man and the possibilities of human nature as 
essentially political, dominated his attitude toward the material 
world, and the pursuit of agriculture, commerce, and industry. 

Christian teaching carried this Greek conception of the supreme 
worth of human life much farther by presenting it in its super- 
natural aspects. The doctrine of the Incarnation asserted that the 
human body had afforded an adequate medium for the manifesta- 
tion of the divine nature; the doctrine of the Resurrection held out 
a sure and certain hope of personal immortality for the human soul. 
Christianity thus involved a very high view of human life. The 
supreme dignity of man as man was set forth by Christian teaching 
and the conscious and habitual subordination of material things to 
human ideals and aspirations was carried further than it had ever 
been before. 

One of the gravest defects of the Roman Empire lay in the fact 
that its system left little scope for individual ends, and tended to 
check the energy of capitalists and laborers alike. But Christian 
teaching opened up an unending prospect before the individual per- 
sonally, and encouraged him to diligence and activity by an eternal 
hope. Nor did such a concentration of thought on a life beyond 
the grave divert attention from secular duties. Christianity brought 
out new motives for taking them earnestly. The Christian monk 
was deprived of civil rights, and was absolutely at the beck and call 
of his superior. But there was no degradation in monastic obedi- 
ence, since it was voluntarily undertaken by a freeman as a disci- 
pline through which he might attain the noblest destiny. 

In fact the chief claim of the monks to our gratitude lies in this 
that they helped to diffuse a better appreciation of the duty and 
dignity of labor. By the "religious" manual labor was accepted as 
a discipline which helped them to walk in the way of eternal salva- 
tion ; it was not undertaken for the sake of reward, since the pro- 
ceeds were to go for the use of the community or the service of the 
poor; it was not viewed as drudgery that had to be gone through 
from dread of punishment. There w^as neither greed of gain, nor 
the reluctant service of the slave, but simply a sense of a duty to be 
done diligently untO' the Lord. 

The acceptance of this higher view of the dignity of human life 
as immortal was followed by a fuller recognition of personal respon- 
sibility. Christianity introduced a new sense of duty in regard to 
the manner of using material things. The wealth of the old world 
had been wasted in the perpetuation of regal pride and the gratifi- 
cation of personal luxury. Provinces had been despoiled and ruined 



ANTECEDENTS OF INDUSTRIALISM 7 

land their resources exhausted rather than developed. Christianity 
iprotested against any employment of wealth that disregarded the 
glory of God and the good of man. 

, This then was the characteristic difference between the ancient 
civilization and the new order which was beginning to flourish in the 
twelfth century. These principles, even though imperfectly realized, 
help us to understand the character of modern civilization. A ca- 
pricious and arbitrary ruler had been hailed with divine honors in 
_a-ncient times ; in the Middle Ages the supremacy of Eternal and 
Supernatural Authority over all human beings was maintained. The 
Christian doctrine of price, the Christian condemnation of gain at 
the expense of another man, affected all the mediseval organizations 
of municipal life and regulation of intermunicipal commerce, and 
introduced marked contrasts to the conditions of business in ancient 
cities. The Christian appreciation of the duty of work rendered 
the lot of the mediaeval villein a very different thing from that of the 
slave in the ancient empire. The responsibility of proprietors was 
so far insisted on as tO' place substantial checks on tyranny of every 
kind. For these principles were not mere pious opinions, but effec- 
tive maxims in practical life. 

B. MANORIAL AND GILD ECONOMY 
3. The Manor, a Self-Sufficient Economy^ 

BY WIIvIvIAM J. ASHLEY 

Till nearly the end of the fourteenth century, England was a 
purely agricultural country. Such manufactures as it possessed 
were entirely for consumption within the land; and for goods of 
finer qualities it was dependent upon importation from abroad. 

In the eleventh century, and long afterwards, the whole coun- 
try, outside the larger towns, was divided into manors, in each of 
wdiich one person, called the lord, possessed certain important and 
valuable rights over all the other inhabitants. Let us picture to 
ourselves an eleventh-century manor in Middle or Southern Eng- 
land. There was a village street, and along each side of it the 
houses of the cultivators of the soil, with little yards around them : 
as yet there were no scattered farmhouses, such as were to appear 
later. Stretching away from the village was the arable land, divided 
usually into three great fields, sown, one with wheat, one with oats 
or beans, while one was left fallow. The fields were sub-divided 

^Adapted from An Introduction to English Economic History and Theory, 
I, 5-49 (1894).. 



8 CURRENT ECONOMIC PROBLEMS 

into "furlongs;" and each furlong into acre or half-acre strips, sep- 
arated, not by hedges, but by "balks" or unploughed turf ; and these 
strips were distributed among the cultivators in such a way that 
each man's holding was made up of strips scattered up and down 
the three fields, and no man held two adjoining pieces. Each holder 
was obliged to cultivate his strips in accordance with the rotation 
of crops observed by his neighbors. There w^ere also meadows, 
enclosed for hay-harvest, and divided into portions by lot, or rota- 
tion, or custom, and after harvest thrown open again for the cattle 
to pasture upon. In most cases there was also some permanent 
pasture or wood, into which the cattle were turned, either "with- 
out stint," or in numbers proportioned to the extent of each man's 
holding. 

The land was regarded as the property, not of the cultivators, 
but of a lord. It was divided into that part cultivated for the imme- 
diate benefit of the lord, the demesne or inland, and that held of 
him by tenants, the land in villenage, the latter being usually about 
two-thirds of the whole. The demesne consisted partly of separate 
closes, partly of acres scattered among those of the tenants in the 
common fields. Of the land held in villenage, the greater part was 
held in whole or half .virgates. The virgate was a holding made up 
of scattered acre or half-acre strips in the three fields, with propor- 
tionate rights to meadow and pasture ; and its extent, varying from 
sixteen to forty-eight acres, was usually thirty acres. The holders 
of such virgates formed an estate socially equal among themselves, 
and all of them were under the same obligations of service to the 
lord. 

The principal services which the lord exacted of the villein were, 
first, a man's labor for two or three days a week throughout the 
year, known as week work, or daily works, and second, additional 
labor for a few days at spring and autumn ploughing and at har- 
vest. On such occasions the lord demanded the labor of the whole 
family, with the exception of the housewife. Besides these, there 
were usually small quarterly payments to be made in money, and 
miscellaneous dues in kind, so many hens and eggs, and so many 
bushels of oats at dififerent seasons ; as well as miscellaneous ser- 
vices, of which the most important is carting. During the boondays 
it was usual for the lord to feed the laborers. 

The fundamental characteristic of the manorial group, regarded 
from the economic point of view, was its self sufificiency, its social 
independence. The same families tilled the village fields from father 
to son. Each manor had its own law courts for the maintenance of 
order. Then as now, -every villag'e had its own church ; with this 



ANTECEDENTS OF INDUSTRIALISM 9 

idvantage or disadvantage, that the priest did not belong to a 
4ifferent social class from his parishioners. The village included 
rtien who carried on all the occupations and crafts necessary for 
e'v^ery-day life. There was always a water or wind-mill which the 
tenants were bound to use, paying dues which formed a considerable 
part of the lord's income. Many villages had their own blacksmith 
and carpenter, probably holding land on condition of repairing the 
ploughs of the demesne and the villagers. 

Thus the inhabitants of an average English village went on, 
year in, year out, with the same customary methods of cultivation, 
living on what they produced, and scarcely coming in contact with 
the outside world. The very existence of towns, indeed, implied 
that the purely agricultural districts produced more than was re- 
quired for their own consumption; and corn and cattle were regu- 
larly sent, even to distant markets. But the other dealings of the 
villages with the outside world were few. First, there was the pur- 
chase of salt, an absolute necessity in the mediaeval world, where 
people lived on salted meat for five months in the year. Second, 
iron was continually needed for the ploughs and other farm imple- 
ments. Third, when a fresh disease, the scab, appeared among the 
sheep, tar became of great importance as a remedy. Perhaps the 
only other recurring need, which the village could not itself supply, 
was that of millstones. 

Such were the chief characteristics of the manorial group as a 
whole, self-sufficiency and corporate unity. Now let us look at the 
position of the individual members in the group. Some had risen 
to the position of free tenants, but the great majority had continued 
to hold by servile tenure. Of the position of this great majority 
the characteristic was permanence, v/ith its disadvantages and also 
with its advantages. 

It is instructive to compare the village as we have seen it with 
the village of today. In one respect there might seem to be a close 
resemblance. Then, as usually now, the village was made up of one 
street, with a row of houses on either side. But the inhabitants of 
the village street now are the laborers and artisans with one or 
more small shop-keepers. The farmers live in separate homesteads 
among the fields they rent, and not in the village street. Then all 
the cultivators of the soil lived side by side. Second, notice the 
difference as to the agricultural operations themselves. Now each 
farmer follows his own judgment in what he does. But the peas- 
ant-farmer of the period we have been considering was bound to 
take his share in a common-system of cultivation, in which the time 
at which everything should be done and the way in which everything 



lo CURRENT ECONOMIC PROBLEMS 

should be done was regulated by custom. A further difference is 
seen in the relations of lord and tenant as to the cultivation. Now- 
adays either the landlord does not himself farm any land in the 
parish, or his management of it is independent of the cultivation of 
any other land by tenants. But then almost all the labor on the 
demesne was furnished by the villein tenants, who contributed 
ploughs, oxen, and men. Compare finally the classes in the manor, 
with those in the village today. In a modern parish there will 
usually be a squire, some three or four farmers, and beneath them 
a comparatively large number of agricultural laborers. But in the 
medi?eval manor, much the greater part of the land was cultivated 
by small holders. Between the lord of the manor and the villein 
tenants there was, indeed, a great gulf fixed. But there was noth- 
ing like the social separation of classes of actual cultivators that 
exists today. 

It m.ay be well to note the non-existence in the village group of 
certain elements which modern abstract economics is apt to take 
for granted. Individual liberty, in the sense in which w^e understand 
it, did not exist; co^nsequently there could be no complete competi- 
tion. The paymients made by the villeins were not rents in the ab- 
stract economist's sense: for the economist assumes comipetition. 
The chief thought of lord and tenant was, not what the tenant could 
possibly afford, but what was customary. And, finally, there was 
as yet no capital in the modern sense. Of course there was capital 
in the sense in which the word is defined by economists, "wealth ap- 
propriated to reproductive employment," for the villeins had 
ploughs, harrows, oxen, horses. But this is one of the most un- 
real of economic definitions. As has been well said, by capital we 
mean more than this ; we mean a store of wealth that can be directed 
into new and more profitable channels as occasion arises. In that 
sense the villeins certainly had no capital. 



4. Wage-Work and the Handicraft System^ 

BY CARL BUCHER 

When the land owned by a family becomes divided up and no 
longer suffices for its maintenance, a part of the rural population 
begins to produce for the market. At first the necessary raw mate- 
rial is gained from their own land or drawn from the communal for- 
ests ; later on, if need be, it also is purchased. All sorts of allied 

^Adapted from Indiistrial Evolution, 162-172. Translated from the third 
German edition by S. Morley Wickett. Copyright by Henry Holt & Co. 
(1900). 



ANTECEDENTS OF INDUSTRIALISM ii 

iiroductions are added; and thus there develops an endlessly varied 
system of peasant industry on a small scale. 

But the evolution may take another course, and an independent 
professional class of industrial laborers arises and with them the 
industrial system of wage-work. Whereas all industrial skill has 
hitherto been exercised in close association with property in land and 
tillage, the adept house-laborer now frees himself from this associa- 
tion, and upon his technical skill founds for himself an existence 
that gradually becomes independent of property in land. But he has 
only his simple tools for work; he has no business capital. He 
therefore always exercises his skill upon raw material furnished him 
by the producer of the raw material, who is at the same time the 
consumer of the finished product. 

Here two distinct forms of this relationship are possible. In 
one case the wage-worker is taken temporarily into the house, 
receives his board and, if he does not belong to the place, his lodging 
as well, together with his daily wage ; and leaves when the needs of 
his customer are satisfied. We may designate this whole industrial 
phase as that of itinerancy, and the laborer carrying on work in this 
manner as an itinerants The dressmakers and seamstresses whom 
our women are accustomed to take into their houses may serve as 
an illustration. On the other hand the wage-worker may have his 
own place of business, and the raw material be given out to him. 
For working it up he receives a piece-work wage. In the country 
the miller and the baker working for a wage are examples. We will 
designate this form of work home-work. It is met with chiefly in 
industries that demand permanent means of production, difficult to 
transport. Both forms of work are still very common in all parts 
of the world. The system can be tracted in Babylonian temple rec- 
ords ; it can be followed in literature from Homer down through 
ancient and mediaeval times to the present day. These two forms of 
wage-work have different origins. Itinerant labor is based upon the 
exclusive possession of aptitude for a special kind of work, home- 
work upon the exclusive possession of fixed means of production. 
Upon this basis there arise all sorts of mixed forms between home- 
work and wage-work. The itinerant laborer is at first an experienced 
neighbor whose advice is sought in carrying out an important piece 
of work, the actual work, however, still being performed by members 
of the household. Even later it is the practice for ,the members of 
the customer's family to give the necessary assistance to the crafts- 
man. In the case of home-work the latter tradesman is at first merely 
the owner of the business plant and technical director of the produc- 
tion, the customer doing the actual work. This frequently remains 
true in the country today with oil-presses, flax-mills, and cider-mills. 



12 CURRENT ECONOMIC PROBLEMS 

From the economic point of view the essential feature of the 
wage-work system is that there is no business capital. Neither the 
raw material nor the finished industrial product is for its producer 
ever a means of profit. The character and extent of the production 
are still determined in every case by the owner of the soil, who pro- 
duces the raw material; he also superintends the whole process of 
production. From the sowing of the seed until the moment the bread 
is consumed the product has never been capital, but always a mere 
article for use in course of preparation. No earnings of manage- 
ment and interest charges or middleman's profits attach to the fin- 
ished product, but only wages for work done. 

Under certain social conditions this is a thoroughly economic 
method of production. It secures the excellence of the product and 
the complete adjustment of supply to demand. But it forces the con- 
sumer to run the risk attaching to industrial production, as only those 
needs that can be foreseen can find suitable and prompt satisfaction, 
while a sudden need must always remain unsatisfied. The system 
has also many disadvantages for the wage-worker. Among these 
are the inconveniences and loss of time suffered in his itinerancy 
from place to place ; also the irregularity of employment, which leads, 
now to the overwork, now to the complete idleness, of the workman. 

In the Middle Ages wage-work greatly facilitated the emancipa- 
tion of the artisan from serfdom and feudal obligations, as it re- 
quired practically no capital to start an independent business. It is a 
mistake still common to look upon the class of gild handicraftsmen 
as a class of small capitalists. It was in essence rather an industrial 
laboring class, distinguished from the laborers of today by the fact 
that each worked not for a single employer but for a large number 
of consumers. The supplying of the material by the customer is 
common to almost all mediaeval handicrafts ; in many instances, 
indeed, it continued for centuries, even after the customer had 
ceased to produce the raw material himself and must buy it. The 
furnishing of the raw material by the master is a practice that takes 
slow root ; at first it holds only for the poorer customers ; but later 
for the wealthy as well. Thus arises handicraft; but alongside it 
wage-work maintains itself for a long time. 

All the important characteristics of handicraft may be summed 
up in the single expression custom production. It is the method of 
sale that distinguishes this industrial system from all later ones. 
The handicraftsman always works for the consumer of his product, 
whether it be that the latter by placing separate orders affords the 
occasion for the work, or the two meet at the weekly or yearly mar- 



ANTECEDENTS OF INDUSTRIALISM 13 

ket. As a rule the region of sale is local. The customer buys at 
first hand, the handicraftsman sells to the actual consumer. This 
assures a proper adjustment of supply and demand and introduces 
an ethical feature into the whole relationship ; the producer in the 
presence of the consumer feels responsibility for his work. 

With the rise of handicraft a wide cleft appears in the process 
of production. Hitherto the owner of the land has conducted the 
whole process ; now there are two classes of economic activity, each 
of which embraces only a part of the process of production, one pro- 
ducing the raw material, the other the manufactured article. Handi- 
craft endeavored to bring it about that an article should pass through 
all its stages of production in the same workshop. In this way needed 
capital is diminished and frequent additions to price avoided. 

The direct relationship of the handicraftsman and the consumer 
of his products made it necessary that the business remain small. 
Whenever any one line of handicraft threatens to become too large, 
new handicrafts split off from it and appropriate part of the sphere 
of production. This is the mediaeval division of labor, which con- 
tinually creates new and independent trades. 

Handicraft is a phenomenon peculiar to the town. Peoples which, 
like the Russians, have developed no real town life, know likewise 
no national handicraft. And this also explains why, with the forma- 
tion of large centralized states and unified commercial territories, 
handicraft was doomed to decline. 



5, Ordinances of the Gild Merchant of Southampton* 

1. In the first place,- there shall be elected from the Gild Mer- 
chant, and established, an alderman, a steward, a chaplain, four 
skevins, and an usher. And it is to be known that whosoever shall 
be alderman shall receive from each one entering into the Gild four- 
pence ; the steward, twopence ; the chaplain, twopence ; and the 
usher, one penny. And the Gild shall meet twice a year: that is to 
say, on the Sunday next, after St. John the Baptist's day, and on 
the Sunday next after St. Mary's day. 

2. And when the Gild shall be sitting no one of the Gild is 
to bring in any stranger, except when required by the alderman or 
steward. 

3. And when the Gild shall sit, the alderman is to have, each 
night, so long as the Gild sits, two gallons of wine and two candles, 

^Adapted from University of Pennsylvania, Translations and Reprints 
from the Original Sources of European History, Vol. II, No. i, English 
Towns and Gilds, 12-17 (about 1300). 



14 CURRENT ECONOMIC PROBLEMS 

and the steward the same ; and the four skevins and the chaplain, 
each of them one gallon of wine and one candle, and the usher one 
gallon of wine. 

4. And when the Gild shall sit, the lepers of La Madeleine 
shall have of the alms of the Gild, two sesters of ale, and the sick 
of God's House and of St. Julian shall have two sesters of ale. And 
the Friar's Minors shall have two sesters of ale and one sester of 
wine. And four sesters of ale shall be given to the poor wherever 
the Gild shall meet. 

5. And when the Gild is sitting, no^ one who is of the Gild 
shall go outside of the town for any business, without the permis- 
sion of the steward. And if any one does so,, let him be fined two 
shillings, and pay them. 

6. And when the Gild sits, and any gildsmian is outside of the 
city so that he does not know when it will happen, he shall have: 
a gallon of wine, if his servants come tO' get it. 

9. And when a gildsman dies, his eldest son or his next heir 
shall have the seat of his father, or of his uncle, if his father was 
not a gildsman, and of no other one ; and he shall give nothing for 
his seat. No husband can have a seat in the Gild by right of his 
wife, nor demand a seat by right of his wife's ancestors. 

10. And no one has the right or power to sell or give his seat 
in the Gild to any man. 

19. And no one in the city of Southampton shall buy anything 
to sell again in the same city, unless he is of the Gild Merchant or 
of the franchise. And if anyone shall do so and is convicted of it, 
all which he has so bought shall be forfeited to the king. 

20. And no one shall buy honey, fat, salt herrings, or any kind 
of oil, or millstones, or fresh hides, or any kind of fresh skins, un- 
less he is a gildsman ; nor keep a tavern for wine, nor sell cloth at 
retail, except in market or fair days ; nor keep grain in his granary 
beyond five quarters, to sell at retail, if he is not a gildsman ; and 
whoever shall do this and be convicted shall forfeit all to the king. 

21. No one of the Gild ought to be partner or joint dealer in 
any of the kinds of merchandise before mentioned with anyone 
who is not of the Gild, by any manner of coverture, or art, or con- 
trivance, or collusion, or in any other manner. 

23. And no private man nor stranger shall bargain for or buy 
any kind of merchandise coming into the city before a burgess of 
the Gild Merchant, so long as the gildsman is present and wishes to 
bargain for and buy this merchandise. 

24. And anyone who is of the Gild Merchant shall share in all 
merchandise which another gildsman shall buy or any other person, 



ANTECEDENTS OF INDUSTRIALISM 15 

whoever he is, if he comes and demands part and is there where the 
merchandise is bought, and also if he gives satisfaction to the seller 
and gives security for his part. 

63. No one shall go out to meet a ship bringing wine or other 
merchandise coming to the town, in order to buy anything, before 
the ship be arrived and come to anchor for unloading; and if any 
one does so and is convicted, the merchandise which he shall have 
bought shall be forfeited to the king. 

6. Ordinances of the White-Tawyers^ 

In honour of God, of Our Lady, and of All Saints, and for the 
nurture of tranquillity and peace among the good folks the Megu- 
cers, called white-tawyers, the folks of the same trade have, by as- 
sent of Richard Lacer, Mayor, and of the Aldermen, ordained the 
points under-written. 

In the first place, they have ordained that they will find a wax 
candle, to burn before Our Lady in the Church of Allhallows, near 
London wall. 

And if any one of the said trade shall depart this life, and have 
not wherewithal to be buried, he shall be buried at the expense of 
their common box. And when any one of the said trade shall die, 
all those of the said trade shall go to the vigil, and make offering 
on the morrow. 

Also, that no one of the said trade shall induce the servant of 
another to work with him in the said trade, until he has made a 
proper fine with his first master, at the discretion of the said over- 
seers, or of four reputable men of the said trade. And if anyone 
shall do to the contrary thereof, or receive the serving workman of 
another to work with him during his term, without leave of the trade, 
he is to incur the said penalty. Also, that no one shall take for 
working in the said trade more than they were wont heretofore. 

7. Preamble to the Ordinances of the Gild of the Tailors, Exeter*' 

To the worship of God and of our Lady Saint Mary, and of St. 
John the Baptist, and of all Saints: These be the Ordinances made 
and established of the fraternity of craft of tailors, of the city of 
Exeter, by assent and consent of the fraternity of the craft afore- 
said gathered there together, for evermore to endure. 

^Adapted from University of Pennsylvania, ihid., 23-25 (Fourteenth 
Century). 

"Adapted from University of Pennsylvania, ibid., 26 (1466). 



1 6 CURRENT ECONOMIC PROBLEMS 

C. MEDIEVAL COMMERCE 
8. A Definition o£ Commerce^ 

BY J. DORSE Y FORREST 

Attempts to study the development of commerce have usually 
been unsatisfactory because they have failed to distinguish betw^een 
real commercial activity and the mere external mechanism of ships 
and roads and travelers. The real history of commerce which will 
some time be written will give some account of the production which 
has fed commerce, as well as a description of the routes, and of 
some actual exchanges which indicate that commerce had actually 
been going on. Such phenomena of the mechanism of trade are 
worthy of note, but only as guiding the student to a deeper study 
of the dynamical phenomena of which these are but surface indica- 
tions. Real commerce represents a differentiation of function bv 
which the diverse parts oi society come into complex and organic 
relations with one another. 

9. The Attitude of the Mediaeval Church toward Commerce® 

BY WIIvUAM J. ASHLEY 

The teaching of the Gospel as to worldly goods had been un- 
mistakable. It had repeatedly warned men against the pursuit of 
wealth, which would alienate them from the service of God and 
choke the good seed. It had in one striking instance associated 
spiritual perfection with the selling of all that a man had that he 
might give it to the poor. It had declared the poor and hungry 
blessed, and had prophesied woes to the rich. Instead of anxious 
thought for the food and raiment of the morrow, it had taught trust 
in God; instead of selfish appropriation of whatever a man could 
obtain, a charity which gave freely to all who asked. And in the 
members of the earliest Christian Church it presented an example 
of men who gave up their individual possessions, and had all things 
in common. 

We cannot wonder that, with such lessons before them, a salu- 
tary reaction from the self-seeking of the pagan world should have 
led the early Christian Fathers totally to condemn the pursuit of 
gain. It took them further — ^to the denial to the individual of the 

■^Adapted from The Development of Western Civilisation, 194. Copy- 
right by the University of Chicago (1906). 

^Adapted from An Introduction to English Economic History and Theory 
1, 126-132 (1894). ' 



ANTECEDENTS OF INDUSTRIALISM 17 

right to do what he liked with his own, even to enjoy in luxury the 
wealth he possessed. "What injustice is there in my diligently 
preserving my own, so long as I do not invade the property of an- 
other?" "Shameless saying!" says S. Ambrose. "My own, sayest 
thou? what is it? from what secret places hast thou brought it into 
this world? When thou enterest into the light, when thou camest 
from thy mother's womb, what wealth didst thou bring with thee? 
That which is taken by thee, beyond what would suffice to thee, is 
taken by violence. Is it that God is unjust, in not distributing to 
us the means of life equally, so that thou shouldst have abundance 
while others are in want? It is the bread of the hungry thou keep- 
est, it is the clothing of the naked thou lockest up; the money thou 
buriest is the redemption of the wretched." To^ seek to enrich one's 
self was not, simply, to incur spiritual risk to one's own soul ; it was 
in itself unjust, since it aimed at appropriating an unfair share of 
what God had intended for the common use of men. If a man pos- 
sessed more than he needed, he was bound tO' give his superfluity to 
the poor ; for by natural law he had no personal right to it ; he was 
only a steward for God. 

If, however, to seek to enrich one's self was sinful, was trade 
itself justifiable? This was a question which troubled many con- 
sciences during the Middle Ages. On the one hand the beriefits 
which trade conferred on society could not be altogether overlooked, 
nor the fact that with many traders the object was only to obtain 
what sufficed for their own maintenance. On the other hand they 
saw that trade was usually carried on by men who had enough al- 
ready, and whose chief object was their own gain: "If covetousness 
is removed," urges Tertullian, "there is no reason for gain, and, if 
there is no reason for gain, there is no need of trade." Moreover, 
as the trader did not seem himself to add to the value of his wares, 
if he gained more for them than he had paid, his gain, said vS. 
Jerome, must be another's loss ; and, in any case, trade was danger- 
ous to the soul, since it was scarcely possible for a merchant not 
sometimes to act deceitfully. To all these reasons was added yet 
another. The thought of the supreme importance of saving the in- 
dividual soul, and of communion with God, drove thousands into 
the hermit life of the wilderness, or into monasteries; and it led 
even such a man as Augustine to say that "business" was in itself 
an evil, for "it turns men from seeking true rest, which is God." 

In the eleventh century began a great moving of the stagnant 
waters. The growth of towns, the formation of merchant bodies, 
the establishment of markets, — even if they did no more than fur- 
nish the peasant and the lord of the manor with a market for their 



i8 CURRENT ECONOMIC PROBLEMS 

surplus produce, — ^brought men face to face with one another as 
buyer and seller in a way they had not been before. Hence economic 
questions, especially such as concerned the relations of seller and 
buyer, of creditor and debtor, became of the first importance. To 
deal with these new questions a new jurisprudence presented itself, 
— the jurisprudence based on the revived study of Roman law. The 
Roman law, in the finished form in which the codification of Jus- 
tinian presented it, rested on a theory of absolute individual prop- 
erty which was entirely alien to the usages of early Teutonic peo- 
ples, among whom community of ownership, or at any rate com- 
munity in use, was still a prevalent custom; and it recognized an 
unlimited freedom of contract, which may have been suitable to the 
active commerce of the Mediterranean, but was sure to be the in- 
strument of injustice when appealed to in the midst of more primi- 
tive social conditions. 

With these new dangers before them, churchmen began once 
more to turn their attention to economic matters, and to meet what 
they regarded as the evil tendencies of the Roman law, "the prin- 
ciple of the world," by a fresh application of Christian principles. 
On two doctrines especially did they insist, — that wares should be 
sold at a just price, and that the taking of interest was sinful. They 
enforced them from the pulpit, in the confessional, in the ecclesias- 
tical courts; and by the time that the period begins of legislative 
activity on the part of the secular power, these two rules had been 
so impressed on the consciences of men that Parliament, municipality, 
and gild endeavoured of their own motion to secure obedience to 
them. 

10. The Contribution of the Church to Commercial Develop- 
ment^ 

BY J. DORSEY F0RRE;ST 

A necessary prerequisite of comimercial development was the 
establishment of an efficient agricultural system. In perfecting the 
agricultural organization the ecclesiastical domains served as models 
to the smaller lay proprietors. The monasteries depended more on 
rational organization than on personal power, and kept alive the 
more efficient methods employed by the R.omans in earlier days. 
The monasteries usually established themselves on waste lands, for 
the prime object of the monks was retirement. After the invasions 
they had no difficulty in finding waste lands even in regions which 

"Adapted from The Development of Western Civilization, 176-179, 
190-194. Copyright by the University of Chicago (1906). 



ANTECEDENTS OF INDUSTRIALISM 19 

had been most highly cultivated. Great saints could live holy lives 
as hermits ; but when masses of men were gathered together, it 
became necessary for the leaders to lay down rules for practical 
activity. The poverty from which man}^ of the monks came, the 
reverence of the Church for the Son of the Carpenter, and the ne- 
cessity of labor for a means of subsistence, all combined to give 
manual labor a high moral value in the monasteries. Accordingly 
monastic rules enjoined the duty of manual labor as a moral disci- 
pline. 

A second prerequisite of commerce was the division of labor and 
the development of the crafts. In time neig'hboring lords would 
give vast domains, with their villeins, to the monasteries in return 
for prayers. As the monasteries thus grew wealthy, a revolution 
came in the management of their internal affairs. All had to find 
a way to divide labor and to- make some members of the community 
mere laborers. In feudal times this division was well advanced. 
For centuries the monks had kept alive many crafts, and the causes 
just referred to advanced these both in number and in technique. 

In spite of the disorder which had troubled Europe from the 
time of the first invasion, there was never a time when commercial 
intercourse was entirely wanting. During the period of most com- 
plete disorganization the Jews carried on a casual trade in oriental 
luxuries and handled about all the money that circulated. United 
by faith and common traditions, in constant touch with co-religion- 
ists in other countries, they formed an organic body in the midst 
of universal dissolution. The very action of the church upon the 
lay society contributed to their prosperity. The canons of the 
councils in denying to Christians the right to exact usury assured 
to the Jews a monopoly of the money business. Through their inti- 
mate relations with the Mohammedans, they were able to communi- 
cate with the East at a time when no Christian could sail upon the 
Mediterranean. The Church condoned their offenses against Chris- 
tian morality because their services as money-lenders and dealers in 
valuables were indispensable. They were found also dispersed 
throughout the country, and on the domains plied their trade as 
pawnbrokers among the villages and brokers for the lords. Though 
the business of the Jews had some importance as a stimulus to 
greater demands for luxuries, it can hardly be considered a part of 
the commerce of Europe. Such commodities as spices, perfumes, 
silks, tapestries, precious stones, and jewelry were of little import- 
ance in the social development of Europe. 

Preparation for the revival of commerce was made by the 
Church. The importance of magic made it desirable to transport 



20 CURRENT ECONOMIC PROBLEMS 

sacred relics from place to place ; and the need of pictorial services 
required the transportation of church furnishings from Byzantium 
and Italy to the less advanced communities. For the manufacture 
of glass and the erection of the earlier buildings artisans themselves 
had to be imported from the East and the South. There vv^as also 
a constant intercommunication in certain sections through pilgrim- 
ages to noted shrines. When special festivals were held at these 
shrines, large numbers of pilgrims would be present at the same 
time. The provisioning of such a company would occasion consid- 
erable trade, and peddlars and traders would naturally join the 
pilgrims. Sometimes the monks were themselves traders. Some- 
times men would bring their simple manufactures from domains 
in the neighborhood." In some instances the important fairs sprang 
up at these favorite shrines. But, aside from trade, the pilgrimages 
themselves kept up communication between dififerent points. Again 
the superstitious awe in which the Church was held made it possi- 
ble for priests and monks and messengers and pilgrims to travel 
from place to place as neither m^erchants nor soldiers could do. Thus 
the commerce of the Church and the travel inspired by the Church 
served to keep open routes which were closed to ordinary travelers. 
and to bring remote regions into communication with each other. 

The episcopal cities were also centres of incipient commercial 
transactions. Since the bishop did not move from one domain to 
another to consume the products O'f each in turn, as the lay nobles 
did, the products of surrounding manors had to be transported to 
the residence of the bishop. Thus there was maintained a kind of 
industrial concentration that might form the basis for new city life. 
In these various ways the churches and monasteries contributed 
largely to the commercial development. But they simply prepared 
society for a revival of commercial activity by keeping up com- 
munication and furnishing inns for travelers. 

II. Italian Commerce and Industry in the Fourteenth Century^" 

BY THOMAS B. MACAUIyAY 

Liberty, partially indeed and transciently, revisited Italy ; and with 
liberty came comimerce and empire, science and taste, all the com- 
forts and all the ornaments of life. The Crusades, froin which the 
inhabitants of other countries gained nothing but relics and wounds, 
brought to the rising commonwealths of the Adriatic and Tyrrhene 
seas a large increase of wealth, dominion, and knowledge. The 

^"Adapted from the essay on Machiavelli (1827). 



ANTECEDENTS OF INDUSTRIALISM 21 

moral and geographical position of these commonwealths enabled 
them to profit alike by the barbarism of the West and the civiliza- 
tion of the East. Italian ships covered every sea. Italian factories 
rose on every shore. The tables of Italian moneychangers were 
set in every city. Manufactures flourished. Banl-cs were established. 
The operations of the commercial machine were facilitated by many 
useful and beautiful inventions. We doubt whether any country 
of Europe, our own excepted, has at the present time reached so 
high a point of wealth and civilization as some parts of Italy had 
attained four hundred years ago. Historians rarely descend to those 
details from which alone the real state of a community can be col- 
lected. Hence posterity is too often deceived by the vague hyper- 
boles of poets and rhetoricians, who mistake the splendour of a 
court for the happiness of a people. Fortunately John Villani has 
given us an ample and precise account of the state of Florence in 
the early part of the fourteenth century. The revenue of the Re- 
public amounted to three hundred thousand florins ; a sum which, 
allowing for the depreciation of the precious metals, was at least 
equivalent to six hundred thousand pounds sterling; a larger sum 
than England and Ireland, two centuries ago, yielded annually to 
Elizabeth. The manufacture of wool alone employed two hundred 
factories and thirty thousand workmen. The cloth annually pro- 
duced sold, at an average, for twelve hundred thousand florins ; a 
sum fully equal in exchangeable value to two millions and a half 
of our money. Four hundred thousand florins were annually coined. 
Eighty banks conducted the commercial operations, not of Florence 
only but of all Europe. The transactions of these establishments 
were sometimes of a magnitude which ma}^ surprise even the con- 
temporaries of the Barings and the Rothchilds. Two houses ad- 
vanced to Edward the Third of England upwards of three hundred 
thousand marks, at a time when the mark contained more silver than 
fifty shillings of the present day, and when the value of silver was 
more than quadruple of what it .now is. The city and its environs 
contained a hundred and seventy thousand inhabitants. 

D. MEDIEVAL INDUSTRIAL POLICY 
12. The Spirit of Solidarity in the Mediaeval Town 

Town and gild ordinances furnish abundant evidence of a spirit 
of social solidarity animating industrial legislation which is quite for- 
eign to the modern point of view. There was a determined attempt on 
the part of the authorities to prevent "regrating," or buying to sell 
again at a higher price; "forestalling," or outwitting fellow dealers 



22 CURRENT ECONOMIC PROBLEMS 

by purchasing goods before they came into open market ; and "en- 
grossing," or the modern cornering-the-market. Gild documents 
are replete with statutes the purpose of which was to secure to the 
consumer the use of the best raw materials, the exercise of care and 
skill on the part of the workman, and full measure. While instances 
could be multiplied, the custom in the city of Chester that "a man 
or woman making false measure and being arrested, compounded 
for it with four shillings ;" the custom in the same town of punish- 
ing with the ducking stool the maker of bad ale; and the statute of 
the spurriers of London to the effect that "no one of the trade of 
spurriers shall work longer than from the beginning of the day until 
curfew rings out of the church of St. Sepulcher," are typical exam- 
ples of legislation of this kind. But perhaps, to the modern mind, 
the strangest of all the customs was the levying of export duties and 
the frequent prohibition of the export of certain articles, usually 
food-stuffs. The purpose of such taxes and prohibitions is implicit 
in the frequently appended clause, "because of the scarcity of the 
commodity in the city of late." A careful examination of the evi- 
dence shows that it was framed in the interest of producers-consum- 
ers by men who were not sufficiently used to the intermediate money 
term to separate the two parts of the economic process. 

An explanation of the attitude implicit in this legislation is sim- 
ple when the conditions of life in the mediaeval town are kept clearly 
in mind. These laws Avere enacted, not because men of the Middle 
Ages were less acquisitive than modern men, or were more imbued 
with the spirit of Christianity, but because of the peculiar exigen- 
cies of Mediaeval town life. The Mediaeval town, settled by alien 
merchants, villeins from near-by manors, emancipated or runaway 
serfs, and fortune seekers from far and near, began its career with 
no sharply drawn class lines and few local traditions. It was the 
product of a new industrial movement which threatened to rob the 
First and Second Estates of the social and economic preeminence 
which they had enjoyed for centuries. The nature and aspirations 
of town life were incompatible with the customs oi feudalism. 
There was an inevitable opposition between the larger industrial 
entity which bourgoisie life made necessary and the smaller unit in 
which alone the spirit of feudalism could survive. There developed 
consequently a hostility between the old and the new, and it became 
necessary to fight for existence. From such a common struggle a 
spirit of solidarity necessarily emerged. 

An influence even stronger was the economic dependence of the 
town. It will not be denied, I think, that where the conditions of 
existence are severe, a strong feeling oi common interests grows 



ANTECEDENTS OF INDUSTRIALISM 23 

up within the group. Such conditions existed in the mediaeval town. 
It must be admitted that the transition from the Roman system of 
slavery to the mediseval system of serfdom represented a great eco- 
nomic gain. The serf, freed from gang work and thrown on his 
own resources, with rents fixed by immutable custom, and with the 
assurance of a right to enjoy all the surplus produced above the stip- 
ulated rent, held a position that gave promise of efficiency. He was 
in position to produce an agricultural surplus, a necessary antece- 
dent to the development of the town. But the real gain in the transi- 
tion from slavery to serfdom was potential and not actual. It is 
very doubtful whether the serf oi the twelfth century was produc- 
ing as much as the slave in the palmy days of the Empire. To make 
this potential surplus actual, the wants of the agricultural laborer 
had to be developed. Despite the principle of the indefinite expansi- 
bility of wants, this process was slow, depending upon the chance 
visits of travelling merchants, the fairs, and the slow development 
of the towns. Consequently the precariousness of its food supply 
made the threat of starvation a very real one to the town. The 
result was necessarily legislation which sought to conserve the food 
supply. 

It is true that differentiation of occupations characterized the 
town almost from the very beginning. Even in the days of the 
early gild merchant individual interests were not completely iden- 
tical with communal interests. But the technical methods of the 
gildsman were simple and direct, necessitating the use of very little 
capital, and causing industry to be carried on on a small scale. The 
relationship of the master workman to the members of his estab- 
lishment was personal. Generally speaking goods were made to 
order. The artisan knew the eccentricities of his customers, and was 
anxious to humor them. The industrial process was a short-time 
one, goods were generally consumed in the neighborhood in which 
they were produced, and if any flaw in material or defect in work- 
manship was discovered, the producer would likely hear of it. 
Under such conditions the social ownership of productive goods 
only gradually gave way to the ever-enlarging area of indi- 
vidual property-rights. Hence the two processes of produc- 
tion and consumption were practically identified in the mind 
of the townsman. 

This breadth of view-point in domestic relations can best be 
understood by its contrast with the townsman's conduct of for- 
eign or out-of-town trade. The current code of business ethics 
allowed inferior materials and poor workmanship to be used in 
the production of articles for the foreign market. The interests 



24 CURRENT ECONOMIC PROBLEMS 

of the foreigner were not protected by the customary, or just, 
price; and if, by hook or crook, the townsman could put off short 
weight on the foreigner, so much the better. In short, here the 
element of personality was minimized; and, for that reason, pro- 
duction, the social means, became to the artisan an individual end. 
In this attitude toward foreign trade is to be found the beginning 
of the entrepreneur view-point. As the industrial entity increased 
in size and complexity, as the time of the productive process was 
lengthened, and as business relations became more impersonal, it is 
quite natural that the gildsman's attitude towards foreigners should 
come to be his attitude towards all customers. 

Yet the influence of mediaeval thought in promoting the spirit of 
solidarity is not to be wholly overlooked. The town was born in an 
atmosphere saturated with the spirit of Mediaeval Catholicism. 
Brotherhood and equality had long been preached by the Church. 
Vertical, or inter-class equality was never realized, either in Chiv- 
alry or in the Church. But many mediaeval institutions presented at 
least a fair semblance of horizontal, or intra-class equality. It was 
under the influence of ecclesiastical precedents that the towns es- 
tablished their new organizations. A study of the characteristic 
features of the gilds shows how great was the number of things for 
which they were indebted tO' religious institutions, and how few 
were the real innovations springing out of the newly created urban 
life. Influenced by such habits of thought and freed from the ob- 
stacles opposed by an already stratified society, the merchant gild 
legislated with the end in view of placing social interests above class 
or individual interests. Intellectual conditions and the pressure of 
economic and political necessity prevented the formal sacrifice of 
social weal to individual acquisition. 

13. Articles of the Spurriers of London^^ 

In the first place,^that no one of the trade of Spurriers shall 
work longer than from the beginning of day until curfew rung out 
at the Church of St. Sepulchre, without Newgate ; by reason that no 
man can work so neatly by night as by day. And many persons of 
the said trade, who compass how to practice deception in their 
work, desire to work by night rather than by day; and then they 
introduce false iron, and iron that has been cracked, for tin ; and 
also they put gilt on false copper, and cracked. And further. — 
many of the said trade are wandering about all day, without work- 
ing at all at their trade; and then when they have become drunk 

^'■Adapted from University of Pennsylvania, op. cit., 21-22 (134S). 



ANTECEDENTS OF INDUSTRIALISM 25 

and frantic, they take to their work, to the annoyance of the sick, 
and all their neighborhood, as well by reason of the broils that arise 
between them and the strange folks who are dwelling among them. 
And then they blow up their fires so vigorously, that their forges 
begin all at once to blaze to the great peril of themselves and of all 
the neighborhood around. And then, too, all the neighbors are 
much in dread of the sparks, which so vigorously issue forth in all 
directions from the mouths of the chimneys in their forges. By 
reason thereof it seems unto them that working by night should be 
put an end to, in order such false work and such perils to avoid : 
and, therefore, the Mayor and the Aldermen do will, by the assent 
of the good folks of the said trade, and for the common profit, that 
from henceforth such tim,e for working, and such false work made 
in the trade, shall be forbidden. 

14, Mediaeval Tricks of Trade^" 

BY BERTHOLD VON REGENSBURG 

The first are ye that work in clothing, silks, or wool or fur, 
shoes or gloves or girdles. Men can in nowise dispense with you ; 
men must needs have clothing; therefore should ye so serve them 
as to do your work truly; not to steal half the cloth, or to use other 
guile, mixing hair with your wool or stretching it out longer, where- 
by a man thinketh to have gotten good cloth, yet thou hath stretched 
it to be longer than it should be, and maketh a good cloth into 
worthless stuff. Nowadays no man can find a good hat for thy 
falsehood ; the rain will pour down through the brim into his bosom. 
Even such deceit is there in shoes, in furs, in curriers' work ; one 
man sells an old skin for a new, and how manifold are thy deceits 
no man knoweth so well as thou and thy master the devil. 

The second folk are such as work with iron tools. They should 
all be true and trustworthy in their office, whether they work by the 
day or the piece. When they labor by the day, they should not stand 
all the more idle that they may multiply the days at their work. If 
thou laborest by the piece, then thou shouldest not hasten too soon 
therefrom, that thou mayest be rid of the work as quickly as possi- 
ble, and that the house may fall down in a year or two. Thou 
shouldest work at it truly, even as it were thy own. Thou smith, 
thou wilt shoe a steed with a 'shoe that is naught ; and the beast will 
go perchance scarce a mile thereon when it is already broken, and 

^^Adapted from a thirteenth-centurj' sermon, translated in Coulton, 
A Mediaeval Garner, 348-354. 



26 CURRENT ECONOMIC PROBLEMS 

the horse may go lame, or a man be taken prisoner, or lose his life. 
Thou art a devil and an apostate. 

The third are such as are busied with trade ; we cannot do with- 
out them. They bring from one kingdom tO' another what is good 
cheap there, and whatever is good cheap beyond the sea they bring 
to this town, and whatever is good cheap here they carry over the 
sea. Thou, trader, shouldst trust God that He will find thee a liveli- 
hood with true winnings. Yet now thou swearest so loudly how 
good thy wares are, and what profit thou givest the buyer thereby ; 
more than ten or thirty times takest thou the names of the saints in 
vain — God and all His saints, for wares scarce worth five shillings! 
That which is worth five shillings thou sellest, maybe, sixpence 
higher than if thou hadst not been a blasphemer of our Lord, for 
thou swearest loud and boldly : "I have been already offered far 
more for these wares" : and that is a lie. And if thou wilt buy any- 
thing from simple folk, thou turnest all thy mind to see how thou 
mayst get it from him without money, and weavest many lies be- 
fore his face; and thou biddest thy partner go to the fair also, and 
goest then a while away and sayest to thy partner what thou wilt 
give the man for his wares, and biddest him come and offer less. 
Then the simple country fellow is affrightened, and will gladly see 
thee come back. "Of a truth," thou sayest, "by all the saints, no 
man will give thee so much for this as I !" Yet another would have 
given more. 

The fourth are such as sell meat and drink, which no man can 
disregard. Wherefore it is all the more needful that they shouldst 
be true and honest therein ; for other deceit dealeth only with earth- 
ly goods, but this deceit with a man's body. If thou offerst measly 
or rotten flesh that thou hast kept so long until it be corrupt, then 
art thou guilty perchance of one man's life, perchance of ten. Or 
if thou offerest flesh that was unwholesome before the slaughter, or 
unripe of age, which thou knowest well and yet givest it for sale, 
so that folk eat it into their clean souls which are so dear a treasure 
to Almighty God, then dost- thou corrupt the noble treasure which 
God hast buried in every man ; thou art guilty of the blood of these 
folk. The same say I of him who selleth fish. So are certain inn- 
keepers and cooks in the town, who keep their sodden flesh too 
long, whereof a guest eateth and falleth sick thereafter for his life 
long. So also do certain others betray folk with corrupt wine or 
mouldy beer, unsodden mead, or give false measure, or mix water 
with the wine. Certain others, again, bake rotten corn to bread, 
whereby a man may lightly eat his own death ; and they salt their 
bread which is most unwholesome. 



ANTECEDENTS OF INDUSTRIALISM 27 

The fifth folk are such as till the earth for wine or corn. They 
should live truly towards their lords and towards their fellows, and 
among each other; not plough one over the other's landmark, nor 
trespass nor reap beyond the mark, nor feed their cattle to another's 
harm, nor betray their fellows to the lord. Ye lords, ye deal some- 
times so ill with your poor folk, and can never tax them too high ; 
ye would fain ever tax them higher and higher. Thou boor, thou 
bringest to the town a load O'f wood that is all full of crooked billets 
beneath ; so sellest thou air for wood ! And the hay thou layest so 
cunningly on the wagon that no man can profit thereby ; thou art a 
right false deceiver. 

The sixth folk are all that deal with medicine, and these must take 
great head against untruth. He who is no good master of that art, 
let him in nowise undertake it, or folks' blood will be upon his 
head. Take heed, thou doctor, and keep thyself from this as thou 
lovest the kingdom of heaven. We have murderers enough without 
thee to slay honest folk. 

So are some men deceivers and liars like the craftsmen. The 
shoemaker sayeth, "See, there are two most excellent soles," and he 
hath burned them before the fire. And the baker floods his dough 
with yeast, so that thou hath bought mere air for bread. And the 
huxter pours sometimes beer or water into his oil ;' and the butcher 
will sell calves' flesh at times, saying: "It is three weeks old," and 
it is scarce a week old. 

15. The Control of Industry in the Gild Period^^ 

BY Iv. F. SALZMANN 

Broadly speaking, the control of industry may be said to be either 
external, by parliamentary or municipal legislation, or internal, by 
means of craft gilds. These two sections again admit of subdivision 
according as their objects are the protection of the consumer, the 
employer, or the workman. Nor can we entirely ignore legislation 
for purpose of revenue — subsidies and customs. 

If a large number of parliamentary enactments were protective 
of the producer, as for instance the prohibition in 1463 of the 
import of a vast variety of goods from silk ribbands to dripping- 
pans, and from razors to tennis balls, including such incompatibles 
as playing-cards and sacring bells, yet still more were they protective 
of the consumer. For one thing, of course, a single act prohibiting 
certain imports might protect a dozen classes of manufacturers, while 

^^ Adapted from English Industries in the Middle Ages, 200-237 (1913). 



28 CURRENT ECONOMIC PROBLEMS 

the denunciation of one particular species of fraud would probably 
lead ingenious swindlers to invent a succession of others, each 
requiring a separate act for its suppression. Sentimental admirers 
of the past are likely to imagine that the mediaeval workman loved 
a piece of good work for its own sake and never scamped a job. 
Nothing could be farther from the truth. The mediaeval craftsman 
was not called a man of craft for nothing! He had no more con- 
science than a plumber, and his knowledge of ways that are dark 
and tricks that are vain was extensive and peculiar. The subtle 
craft of the London bakers, who, while making up their customer's 
dough, stole a large portion of the dough under their customers' eyes 
by means of a little trap-door in the kneading board and a boy sit- 
ting under the counter, was exceptional only in its ingenuity. Cloth 
was stretched and strained to the utmost and cunningly folded to 
hide defects, or a length of bad cloth would be joined on to a length 
of superior quality; inferior leather was faked up to look like the 
best, and sold at night to the unwary ; pots and kettles were made of 
bad metal which melted when put on the fire, and everything that 
could be weighed or measured was sold by false measure. 

From the consumer's point of view the regulation of prices was 
perhaps the most important problem. The price of raw material 
was too much dependent upon supply and demand to admit of much 
regulation. The local authorities, civic and manorial, took constant 
measures to prevent the artificial enhancement of what we may call 
raw foodstuffs, corn, fish, and meat, the "regrator and forestaller," 
that is to say, the middleman who intercepted supplies before they 
reached the market and forced prices up for his own sole benefit, 
being universally regarded as a miscreant. The economists of that 
period had not grasped the fact that the cleverness shown in buying 
an article cheap and selling the same thing without any further 
expenditure of labor, dear, if done on a sufficiently large scale, justi- 
fies the bestowal of the honor of knighthood or a peerage. In the 
case of manufactured foodstuffs, such as bread and ale, the price was 
automatically fixed by the price of the raw material, and in general 
prices of manufactures were regulated by the cost of the materials. 
The principle that the craftsman should be content with a reasonable 
profit and not turn the casual needs of his neighbors to his own bene- 
fit is constantly brought out in local regulations. 

The question of prices, which were thus so largely composed of a 
varying sum for material, and a fixed sum for workmanship, is 
very intimately connected with the question of wages. The mediaeval 



ANTECEDENTS OF INDUSTRIALISM 29 

economist seems to have accepted the Ruskinian theory that all men 
engaged in a particular branch of trade should be paid equal wages. 
There were, of course, grades in each profession, as master or fore- 
man, workman, and assistant or common laborer, but within each 
grade the rate of payment was fixed. Wages were at all times paid 
on the two systems of piece-work and time, and the hours were, as 
a rule, long. For the building trade at Beverley in the fifteenth cen- 
tury work began in summer at 4 :oo a. m. and continued until 7 :oo 
p. M. ; at 6 :oo a. m. there was a quarter of an hour's interval for 
refreshment, at 8 :oo, half an hour for breakfast, at 1 1 :oo an hour 
and a half to dine and sleep, and at 3 :oo half an hour for further 
refreshment. During the winter months the builders worked from 
dawn till dusk, with half an hour for breakfast at 9:00 o'clock, an 
hour for dinner at noon, and a quarter of an hour's interval at 3 :oo. 
Wages, of course, when paid by the day, varied in winter and sum- 
mer. But, against the long hours, we have to set off the comparative 
frequency of holidays. 

For the protection of the consumer a very thorough system of 
search or inspection was established. The search of weights and 
measures, provisions, cloth, and tanned leather usually belonged to 
the mayor or equivalent borough officer, or in country districts to the 
manorial lord, but usually with other manufactures, and very often 
in the case of cloth and leather, the mayor deputed the duty of 
search to members of the craft gilds elected and sworn for that pur- 
pose. They could inspect the wares either in the workshops or 
when they were exposed for sale, and seize any badly made articles. 
The forfeited goods were either burnt or given to the poor, and the 
offending craftsman fined, set in the pillory, or, if an old offender, 
banished from the town. To facilitate tracing the responsibility for 
bad work, weavers, fullers, hatters, metal-workers, tile-makers, and 
other craftsmen, including bakers, were ordered to put their private 
trademarks on their wares. This process must have been much sim- 
plified by the custom so prevalent of segregating or localizing the 
trades, so that the goldsmiths dwelt in one quarter, the shoemakers 
in another, etc. 

As the trades were kept each to its own district, so was the 
craftsman restricted to his own trade. By a law issued in 1364 artif- 
icers were obliged to keep to one "mystery" or craft, an exception 
being made in favor of women acting as brewers, bakers, carders, 
spinners, and workers of wool and linen and silk — the versatility of 
woman, the "eternal amateur," being thus recognized some five cen- 
turies and a half before Mr. Chesterton rediscovered it. Later 



30 CURRENT ECONOMIC PROBLEMS 

statutes forbade shoemakers, tanners, and curriers to infringe on 
each other's province. The general tendency was to keep trades, 
and more especially the allied trades, separate, in order presumably 
to avoid the growth of "combines" and monopolies. For this rea- 
son fishmongers and fishermen were forbidden to enter into partner- 
ship in London, because the dealers, knowing the needs of the city, 
would be able to manipulate supplies and keep up prices. 

How far the desire to restrict output was at the bottom of regu- 
lations forbidding the employment of more than a strictly limited 
number of apprentices and journeymen, and how far such prohibi- 
tions were inspired by fear of the monopolization of labor by capi- 
talists it is difficult to say. Probably the dread of the capitalist was 
the chief incentive for such regulations, which are very numerous. 
The same principle of fair play between employers led to the ordain- 
ing of heavy penalties for taking away another man's servant, or 
employing any journeyman who had not fulfilled his engagement 
with his previous master, and to the strict prohibition of paying more 
than the fixed maximum wages. This last provision was sometimes 
got over by the master's wife giving his servants extra gratuities and 
gifts. So also the use of the cheap labor of women was as a rule 
regarded with disfavor. The fullers of Lincoln were forbidden to 
work with any woman who was not the wife or maid of a master, 
and the "bracers" or makers of braces, of London, in 1355, laid 
down "that no one shall be so daring as to set any woman to work 
in his trade, other than his wedded wife or his daughter." Of child 
labor we hear very little, one of the few notices being an order on 
the children's behalf made, suitably enough, by Richard Whittington, 
in 1398, that whereas some "hurlers" (makers of fur caps) send 
their apprentices and journeymen and children of tender age down 
to the Thames and other exposed places, amid horrible tempests, 
frosts, and snows, to scour caps, to the very great scandal of this 
city, this practice is to cease at once. 

Too much attention must not be given to the quarrelsome side of 
the gilds, for they were essentially friendly societies for mutual assis- 
tance. One of the rules of the London leather-dressers was that if 
a member should have more work than he could complete and the 
work was in danger of being lost, the other members should help 
him. A still more essential feature of the gilds was their grant of 
assistance to members who had fallen ill or become impoverished 
through no fault of their own. Nor did their benevolence end with 
the poor craftsman's death, for they made an allowance to his widow 
and celebrated masses for the repose of his soul. 



ANTECEDENTS OF INDUSTRIALISM . 31 

E. MEDIEVAL ECONOMIC THEORY 
16. The Gospel of Stewardship^* 

BY SAINT THOMAS AQUINAS 

Exterior goods have the character of things useful to an end. 
Hence human goodness in the matter of these goods must consist 
in the observance of a certain measure as is done by a man seeking 
to have exterior riches in so far as they are necessary to his life 
according to his rank and condition. And, therefore, sin consists in 
exceeding this measure, and trying to acquire or retain riches beyond 
the due limit. 

Covetousness may involve immoderation in two ways : in one way 
immediately as to the receiving or keeping of them, when one 
acquires or keeps beyond the due amount; and in this respect it is 
directly a sin against one's neighbor, because in exterior riches one 
cannot have superabundance without another being in want, since 
temporal goods cannot be simultaneously possessed by many. The 
other way is in interior affections, in immoderate love, or desire of, 
or delight in, riches. In this way it is a sin of man against himself 
by the disordering of his affection. It is also a sin against God by 
the despising of eternal good for temporal. 

The Philosopher says : "It belongs to the magnanimous man to 
want nothing or hardly anything." This, however, must be under- 
stood in human measure, for it is beyond the condition of man to 
have no wants at all. For every man needs first of all the divine 
assistance, and secondly also human assistance, for man is naturally 
a social animal, not being self-sufficient for the purposes of life. 

Magnanimity regards two objects, honor as its matter, and some 
good deed in view as its end. Goods of fortune co-operate to both 
these objects. For honor is paid to the virtuous, not by the wise 
only, but by the multitude. Now the multitude make most* account 
of the external goods of fortune; consequently greatest honor is 
paid by them to those who have these things. In like manner goods 
of fortune serve as instruments to acts of virtue, because by riches 
there is opportunity for action. Clearly the goods of fortune con- 
tribute to magnanimity. Virtue is said to be self-sufficient, because 
it can exist even without these external goods ; nevertheless, it 
needs these external goods to have more of a free hand in its 
working. 

"Adapted from Summa Theologica, Quaest, CXVIII; LXXIX, art. l, 
vi et viii (1265-1274). 



32 CURRENT ECONOMIC PROBLEMS 

Solicitude for temporal things is unlawful if we seek temporal 
things as our final goal. Temporal things are subject to man that 
he may use them for his necessity, not that he may set up his rest 
in them, or be idly solicitous about them. 

17. The Usurer's Fate" 

BY CAESARIUS 01^ HlJISTERBACH 

In the days when Oliver was Master of Schools at Cologne (as 
I was told by Brother Bernhard, who was then Oliver's colleague 
and fellow-preacher), there was a certain peasant named Gottschalk 
who busied himself with usury. As he slept one night beside his 
wife, he heard as it were the sound of a mill-wheel turning in his own 
mill ; whereupon he cried for his servant, saying, "Who hath let 
the mill-wheel loose ? Go and see who is there." The servant went 
and came back, for he was too sore afraid to go farther. "Who is 
there?" cried the master. "Such horror fell upon me at the mill- 
door," answered the fellow, "that I must perforce turn back." 
"Well !" cried he, "even though it be the devil, I will go and see." So, 
naked as he was, but for a cloak which he threw over his shoulders, 
he opened the mill-door and looked in, when a sight of horror met 
his eyes. There stood two coal-black horses, and by their side an ill- 
favored man as black as they, who cried, "Quick ! mount the horse, 
for he is brought for thee." When, pale and trembhng, he hesitated 
to obey, the devil cried again, "Why tarriest thou? Cast aside thy 
cloak and come." No longer able to resist, he cast off his cloak, 
entered the mill, and mounted the horse — or rather the devil. The 
Fiend himself mounted another; and, side by side, they swept in 
breathless haste from one place of torture to another, wherein the 
wretched man saw his father and mother in miserable torments. 
There also he saw a certain knight lately died seated on a mad cow 
with his face toward her tail and his back to her horns ; the beast 
rushed to and fro, goring his back every moment so that the blood 
gushed out. To him the usurer said, "Why suffer you this pain?" 
"This cow," replied the knight, "I tore mercilessly from a certain 
widow; wherefore, I must now endure this merciless punishment." 
Moreover, there he was shown a burning fiery chair, wherein could 
be no rest, but torment and interminable pain to him who sat there. 
And it was said, "Now shalt thou return to thy own house, and thou 
shalt have thy reward in this chair." The Fiend brought him back 
and laid him in the mill, half-dead. Here he was found by his wife 

^^Adapted from Dialogus Miraculorum, I, 70. Translation in Coulton, 

A Mediaeval Garner, 212-215 (About 1250). 



ANTECEDENTS OF INDUSTRIALISM 33 

and family, who brought him to bed, and asked where he had been. 
"I have been to hell," he answered, "where I saw such and such tor- 
tures." The priest was called, who warned him to repent of his sins, 
saying that none should despair of God's mercy. He answered, "I 
cannot confess. My seat is made ready ; after the third day I must 
come thither, and there must I receive the reward of my deeds." 
And thus unrepentant, unconfessed, and unanointed he died on the 
third day and found his grave in hell. It is scarce three years since 
these things came to pass. 

18. Usury Versus the Boycott^® 

If any of those who are setting out are bound by oath to pay 
interest, we command that their creditors shall be compelled by the 
same means to release them from their oaths and to desist from the 
exaction of interest. But if any creditor shall compel them to pay 
interest, we order that he shall be forced, by a similar punishment, to 
pay it back. 

We command, however, that the Jews shall be compelled by the 
secular power to remit interest. Until they remit it, all faithful 
Christians shall, under penalty of excommunication, refrain from 
every species of intercourse with them. For those, moreover, who are 
unable at present to pay their debts to the Jews, the secular princes 
shall provide by a useful delay, so that after they begin their journey 
they shall suffer no inconvenience from interest. The Jews shall 
be compelled, after deducting the necessary expenses, to count the 
income which they receive in the meanwhile from the mortgaged 
property toward the payment of the principal; since a favor of this 
kind, which defers the payment and does not cancel the obligation, 
does not seem to cause great loss. 

19. The Characteristics of Mercantilist Doctrine^^ 

BY JOHN KELI^S INGRAM 

The Mercantile doctrine, stated in its most extreme form, makes 
wealth and money identical, and regards it therefore as the great 
object of the community so to conduct its dealings with other na- 
tions as to attract to itself the largest possible share of the precious 
metals. Each country must seek to export the utmost possible quan- 
tity of its own manufactures, and to import as little as possible of 

^"Adapted from Mansi, Conciliorum collectio, XXXII, 1057. This is an 
enumeration of the privileges granted the Crusaders by Innocent III (1215). 

^^Adapted from A History of Political Economy, 37-40 (1887). 



y 



34 CURRENT ECONOMIC PROBLEMS 

those of other countries, receiving the difference of the two values 
in gold and silver. This difference is called the balance of trade, 
and the balance is favorable when more money is received than is 
paid. Governments must resort to all available expedients for the 
purpose of securing such a balance. 

But this statement of the doctrine does not represent correctly 
the views of all belonging to the Mercantilist school. Many of that 
school were much too clear-sighted to entertain the belief that wealth 
consists exclusively in gold and silver. The mercantilists may be 
best described by a set of theoretical tendencies, commonly found in 
combination, though severally prevailing in different degrees in 
different minds. These may be enumerated as follows: — (i) To- 
wards over-estimating the importance of possessing a large amount 
of the precious metals; (2) towards an undue exaltation (a) of 
foreign trade over domestic, and (b) of the industry which works 
up materials over the industry which provides them; (3) towards 
attaching too high a value to a dense population as an element of 
national strength ; and, (4) towards invoking the action of the 
state in furthering artificially the attainment of the several ends 
thus proposed. 

If we consider the contemporary position of Western Europe, 
we shall have no difficulty in understanding how these tendencies 
would arise. The discoveries in the New World had led to a large 
development of the European currencies. A new "money economy" 
had arisen. The mercantilists saw that money was in universal 
demand, and that it put in the hands of its possessor the power of 
acquiring all other commodities. The period, again, was marked by 
the formation of great states, with powerful Governments .at their 
head. These Governments required men and money for the main- 
tenance of permanent armies and for court expenses. Taxation 
grew with the demands of the monarchies. Statesmen saw that for 
their own political ends industry must flourish. But manufactures, 
because they made possible a denser population and a larger total 
volume of exports than agriculture, became the object of special 
Governmental favor and patronage. The growth O'f manufactures 
reacted on commerce, to which a new and mighty arena had been 
opened by the establishment of colonies. The aim of statesmen was 
to make the colonial trade a new source of public revenue. Working 
for their own power, the nations entered into a competitive struggle 
in the economic field. 

A national economic interest came to exist, of which the Gov- 
ernment made itself the representative head. States became a 
sort of artificial hothouses for the rearing of urban industries. 



ANTECEDENTS OF INDUSTRIALISM 35 

Production was subjcted to systematic regulation with the object 
of securing the goodness and the cheapness of the exported 
articles, and so maintaining the place of the nation in foreign 
markets. The industrial control was exercised, in part directly by 
the state, but largely through privileged corporations. High duties 
on imports were resorted to in the interests of national production. 
Commercial treaties aimed at excluding the competition of other 
nations in foreign markets and the exclusion of foreign goods, other 
than raw materials, from the domestic market. The colonies were 
prohibited from trading with European nations other than the par- 
ent country. The mercantile doctrine was essentially the theoretical 
counterpart of the practical activities of the times. Governments 
were led to it by the force of outward circumstance. 

We must pronounce the universal enthusiasm of this period to 
have been essentially just, as leading the nations into the main ave- 
nues of general social development. The organization of agricul- 
ture could not at that time make any marked progress, for it was 
still in the hands of the feudal class. The industry of the towns 
had to precede that of the country. And it is plain that in the life 
of the manufacturing proletariat a systematic discipline could first 
be applied, to be afterwards extended to the rural populations. 
Technical skill must have been promoted by the encouragement of 
industry and commerce. New forms of national production were 
fostered by attracting workingmen from other countries, and by 
lightening the burden of taxation on struggling industries. Com- 
munication and transport were rapidly improved with a view to 
facilitate traffic. And, not the least important, the social dignity 
of the industrial professions was enhanced. 



II 

THE INDUSTRIAL REVOLUTION 

Our historical sketch requires for its completion a study of that later 
aspect of social development which we so often and so strangely call the 
"Industrial Revolution." This movement has done far more than shower' upon 
us a series of "great inventions" or bless mankind with a new technique. 
Appearing gradually and working indirectly, as well as directly, it has affected 
our whole world of thought, of action, and of institutions ; it has modified 
our economics, our politics, our ethics, and even our rehgion; it has changed 
in nature, number, and form our baffling problems ; it has written itself large 
in our culture. In view of its many-sidedness and the gradual way in which 
it has effected and is still effecting its changes, it seems amiss either to call 
it "industrial" or to refer to it as a "revolution." 

We look in vain for its beginnings. We know that early mediaevalism 
could have given us nothing which, even erroneously, could be called an 
"industrial revolution." Before it could appear the mediaeval scheme of 
values had to be transformed. Desires for earthly things had to be freed 
from their unethical taint; a wholesome respect for the world had to be 
built up; man had to acquire greater reverence for his own powers and func- 
tions ; people had to learn to conform to the things of this world if they 
would transform it. This change in the attitude toward life and its prob- 
lems was intimately associated with several other lines of development. 
There appeared a new interest in nature as nature, a new philosophy, a new 
mathematics, and a new physics. These laid the foundation of the new 
technique. Many discoveries of new lands were made, adding tremendous 
resources calling for utilization. There was brought to Europe gold alike 
serviceable for the furtherance of the new money economy and the more 
rapid accumulation of capital. Colonial ventures led to an extension of the 
market and a great increase in the size of the industrial unit. This necessi- 
tated a reorganization of the "factory" and a more extensive use of the 
principle of the division of labor. The last produced a minute specialization 
which both served to create an incentive for the invention of new machines 
and furnished an opportunity for their use. Together with accumulated cap- 
ital and the necessary scientific knowledge this new oi'ganization led to the 
new technique. Even this is not the whole story ; for in England the move- 
ment was hastened by conditions peculiar to the country. The indented coast- 
line, by cheapening transportation and enlarging the market, must have been 
a factor of prominence. It has been suggested, too, that an institution, seem- 
ingly as extraneous as primogeniture, played its part by forcing into mercan- 
tile pursuits those whose veins contained the adventurous blood of nobility. 

The course of the "revolution" has been as comprehensive as its ante- 
cedents. The changes in technique are most clearly appreciated. Even here 
the tendency toward a "machine-process" embracing a large part of the 
industrial system is generally overlooked, as is also the seemingly antagon- 
istic fact that up to the present the conquest of the older system by the ma- 
chine has been partial and incomplete. On the economic side, the increasing 
importance _ of capital, the rise of the "factory system," the disappearance 
of "domestic industry," the trend toward large-scale production, the separa- 
tion of the laborer from the "tools of his trade," and increasing class differ- 
entiation based upon differences in industrial functions are most clearly seen. 
These aspects of the movement raise the questions of artificially controlling 
the tendencies inherent in the development of the machine-system, the deter- 

36 



THE INDUSTRIAL_REVOLUTION 37 

mination of the size of the industrial entity, the social control of large aggre- 
gates of wealth such as railroads and capitalistic monopolies, the elimination 
of economic insecurity which alike attends labor and capital, the equities of 
the distribution of wealth, and the urban enigmas of overcrowding, housing, 
sanitation, vice, and poverty. They reveal, too, just over the horizon the 
more ominous questions of property, inheritance, and the reconstruction of 
industrial society. 

The questions reveal but a single aspect of the influences of the Indus- 
trial Revolution. Political, ethical, religious, and social questions have all 
been involved in the general transformation of life and values. In many 
cases they are inseparably connected with economic problems. For instance, 
when the machine took over the work of the home, the latter became a new 
institution. One writer insists that the home, and woman as well for all that, 
has not yet adapted herself to the new society. We all complain that the 
"machine-process" has entered our colleges, and that college instruction is 
being "standardized" and college graduates "tagged." We all, at least occa- 
sionally, complain of the inability of lav.^ and religion alike to adjust them- 
selves to Modern Industrialism. And our friends in ethics tell us that the 
newer industrial life is effecting startling changes in our standards of social 
and individual ethics. 

And are we sure that we have reached the end of the "revolution"? Most 
likely we are in a second stage of the process where problems are vastly differ- 
ent from those met in the first stage which occupied the larger part of the 
nineteenth century. Perhaps there will be a third stage unlike the second. 
Clearly the end of the new technology is not as yet. The technique first intro- 
duced has not as yet produced its full complement of social results. Quite 
as important, the new technique is being rapidly extended over a wider and 
wider area, constantly affecting the fortunes of people less and less adapted 
to it. Its extention preserves a frontier where machine-culture is constantly 
pushing back a civilization founded on a less complex technique. The reac- 
tion upon our system is fraught with grave consequences. 

A. THE ANTECEDENTS OF THE REVOLUTION 

20. The Characteristics of the Enghsh People^ 

BY AI.]?R^D MARSHAIvI, 

England's geographical position caused her to be peopled by the 
strongest members of the strongest races of northern Europe; a 
process of natural selection brought to her shores those miembers 
of each successive migratory wave who were most daring and self- 
reliant. Her climate is better adapted to sustain energy than any 
other in the northern hemisphere. She is divided by no high hills, 
and no part of her territory is more than twenty miles from naviga- 
ble water. The strength and wise policy of the early kings pre- 
vented artificial barriers from being raised by local magnates. 

The custom of primogeniture inclined the younger sons of noble 
families to seek their own fortunes ; and having no special caste 
privileges they mixed readily with the common people. The fusio^n 
of different ranks tended to make politics business-like; while it 

^Adapted from Principles of Economics, 4th ed., 32-35 (1895). 



38 CURRENT ECONOMIC PROBLEMS 

warmed the veins of business adventure with the generous daring 
and romantic aspirations of noble blood. Resolute in resistance to 
tyranny, they have submitted to authority justified by reason. They 
have known how to combine order and freedom. They alone have 
united a thorough reverence of the past with a power of living for 
the future. 

The English yeomian archer was the forerunner of the English 
artisan. He had the same pride in the superiority of his food and 
his physique over those of his continental rivals ; he had the same 
indomitable perseverance in acquiring perfect control over the use 
of his hands, the same independence and the same power of self- 
control and of rising to emergencies. 

But the industrial facilities of the Englishmen remained latent 
for a long time. They had not inherited much acquaintance with 
nor much care for the comforts and luxuries of civilization. In 
manufactures they lagged behind the rest of Europe. For a long 
tim.e there was no sign on the surface O'f future commerce. They 
had not originally, and they have not now, the special liking for 
dealing and bargaining, nor for the more abstract side of financial 
business which is found among Jews, Italians, and Greeks. Trade 
with them has always taken the form of action rather than man- 
O'Uvering and speculative combination. Even now the subtlest spec- 
ulation on the London Stock Exchange is done by those races which 
have inherited the same aptitude for trading that the English have 
for action. The latter characteristic has impelled the English into 
production, into discovery, invention, business organization, and into 
navigation. Their commercial activities are a result of peculiar con- 
ditions and a development of these latter activities. 

21. English Industry on the Eve of the Revolution^ 

BY ARNOIvD TOYNBEe; 

I must ask you to transport yourselves in imagination to Eng- 
land as it was a century and a quarter ago. Then the farms were 
small and the method of cultivation primitive. The old system of 
common cultivation was still to be seen at work in a large number 
of parishes in the Midland counties. Rotation of crops was only 
imperfectly understood; the practice of growing winter roots and 
artificial grasses was only slowly spreading. "As for the sheep," 
said an old Norfolk shepherd, speaking of a still more recent period, 

^Adapted from "Industry and Democracy," in Lectures on the Industrial 
Revolution, 179-188 (i88r). 



THE INDUSTRIAL REVOLUTION 39 

"they hadn't such food provided for them as they have now. In 
winter there was little to eat except what God Almighty sent for 
them, and when the snow was deep on the ground they ate the ling 
or died off." The cotton industry, which now supports more than 
half a million of persons, was then oppressed by Parliament as a 
possible rival to older industries, and was too insignificant to be . 
mentioned more than once, and then incidentally, by Adam Smith. 
The iron industry, with which the material greatness of England 
has during the present century been so conspicuously associated, was 
gradually dying out. Much of the ore was still smelted by charcoal 
in small furnaces blown by leather bellows worked by oxen. Not 
cotton and iron, but wool was considered, in those days, the great 
pillar of national prosperity. There were few people who doubted 
but that the ruin of England would follow the decay of this cher- 
ished industry. It was only philosophers like Bishop Berkeley, who, 
going very deep into matters, ventured to- ask whether other coun- 
tries had not flourished without the woolen trade. 

To show you the external conditions of industrial life in the 
middle of the last century, I cannot, I think, do better than give a 
short description of the way in which wool was manufactured in 
the neighbourhood of Leeds. The business was in the hands of 
small master-manufacturers who lived, not in the town, but in home- 
steads in the fields, and rented little pasture-farms. Every master 
worked with his own hands, and nearly all the. processes through 
which the wool was put — the spinning, the weaving, and the dyeing 
— were carried on in his own house. Few owned more than three 
or four looms, or employed more than eight or ten people — ^men, 
women, and children. This method of carrying on the trade was 
called the domestic system. "What I mean," said a witness, "by the 
domestic system is the little clothiers living in villages or detached 
places, with all their comforts, carrying on business with their own 
capital ; every one must have some capital, more or less, to carry 
on his trade, and they are in some degree little merchants as well 
as manufacturers, in Yorkshire." A spinning-wheel was tO' be 
found in every cottage and farm-house in the kingdom, a loom in 
every village. 

The mention of this fact brings me to another point in the eco- 
nomic history of this period — the extremely narrow circle in which 
trade moved. In many districts the fanners and labourers used few 
things Avhich were not the work of their own hands, or which had 
not been manufactured a few miles from their hom'cs. The poet 
Wordsworth's account of the farmers' families in Westmoreland, 
who grew on their own land the corn with which they were fed. 



40 CURRENT ECONOMIC PROBLEMS / 

spun in their own homes the wool with which they were clothed, and 
supplied the rest of their wants by the sale of yarn in the neig-hbor- 
ing market town, was not so inapplicable to other parts of England 
as we might at first imagine. If the inland trade was thus, circum- 
scribed, we shall not be surprised to find that our foreign trade was, 
compared with its present dimensions, on a tiny scale. 

Though there were periods of keen distress, there was no such 
thing as long-continued wide-spread depression of trade. Over-pro- 
duction was impossible when the producer lived next door to the 
consumer, and knew his wants as well as the country shoemaker 
of today knows the number of pairs of boots that are wanted in his 
village. And when foreign trade was so insignificant, wars and 
rumours of wars could exercise but little influence over the general 
circle of commerce. 

The expense of carriage was enormous — it cost forty shillings 
to send a ton of coal from Manchester to Liverpool — and it was as 
slow as it was expensive. Adam Smith tells us that it took a broad- 
wheeled wagon, drawn by eight horses, and attended by two men, 
three weeks to carry four tons of goods from London to Edinburgh. 
The roads — even the main roads — were often impassable. A famous 
traveller describes how the high road between Preston and Wigan 
had, even in summer, ruts four feet deep, floating with mud; and 
in many parts of the country the principal means of communication 
were tracks used by pack-horses. Was it not natural that, shut up 
within such narrow confines, unstimulated by wide markets and 
varied intercourse, manufactures advanced but slowly and inven- 
tions were rare? Man's life moved on from generation to genera- 
tion in a quiet course which would seem to us a dull, unvarying 
routine. 

The majority of employers were small masters — manufacturers 
like those already described, who, in ideas and habits of life, were 
little removed from the workmen, out of whose ranks they had 
risen, and to whose ranks they might return once more. There were, 
of course, even then capitalist employers, but on a small scale; nor 
was their attitude to their workmen very different from that of the 
little masters in the same trade. Few of the small masters of whom 
I have spoken did not work with their own hands ; and it was the 
common thing for them to teach their apprentices the trade. Both 
the apprentices, for whose moral education he was responsible, and 
the journeymen were lodged and boarded in the master's house. 
Between men living in such close and continuous relations the bonds 
were naturally very intimate. Nor were these bonds loosened when 
the journeyman married and lived in his own house. The master 



THE INDUSTRIAL REVOLUTION 41 

knew all his affairs, his particular wants, his peculiarities, his re- 
sources, the number of his children, as well as he did before. If the 
weaver was sick, the master lent him money; if trade was slack he 
kept him on at a loss. "Masters and men," said an employer, "were 
in general so j'oined together in sentiment, and, if I may be permit- 
ted to use the term, in love to each other, that they did not wish to 
be separated if they could help it." And the workmen corroborated 
the assertion. "It seldom happens," said a weaver, "that the small 
clothiers change their men except in case of sickness and death." 
It was not uncommon for a workman to be employed by the same 
master for forty years ; and the migration of labourers in search of 
work wag small compared with what goes on in the present day. A 
workman would live and die on the spot where he was born, and 
the same family would remain for generations working for the 
same employers in the same village. Under such conditions the mas- 
ter busies himself with the welfare of the workman, and the educa- 
tion of his children ; the workman eagerly promotes the interests of 
the master, and watches over the fortunes of the house. They are 
not two families but one. 

There is yet one other characteristic of industry in those days 
which remains for us to scrutinize. This is the network of restric- 
tions and regulations in which it was entangled and which exercised 
an importa;nt influence over both its inner and its outer life. Most 
conspicuous were the combination laws, — laws which made it illegal 
for labourers to combine to raise wages, or to strike. "We have no 
Acts of Parliament," says Adam Smith, "against combining to lower 
the price of work, but many agamst combmmg to raise it." And in 
another passage he describes a strike as generally ending, "in noth- 
ing but the punishment or ruin of the ringleaders." And not only 
was combination to raise wages illegal, but emigration from parish 
to parish in search of work was rendered almost impossible by the 
law. These laws, which cruelly hindered the workman in his efforts 
to secure a livelihood, were bad ; but there were other laws directly 
affecting the position of the workman as a citizen which were worse.. 
I select one example. The law of Master and Servant made breach 
of contract on the part of an employer a civil offence, on the part of 
the labourer a crime. „ 

Except as a member of a mob, the labourer had not a shred of 
political influence. The power of making laws was concentrated 
in the hands of the landowners, the great merchant princes, and a 
small knot of capitalist-manufacturers who wielded that power in 
the interests of their class, rather than for the good of the people. 
Nor is the famous assertion of the great economist that, whenever 



42 CURRENT ECONOMIC PROBLEMS / 

Parliament attempted to regulate differences between masters and 
their workmen, its counsellors were always the masters, unsupported 
by facts. It receives lively illustration from the pen of a pamph- 
leteer of the period, who remarks with an air of great naturalness 
and simplicity that "the gentlemen and magistrates ought to aid and 
encourage the clothier in the reduction of the price of labour, as far 
as is consistent, with the laws of humanity, and necessary for the 
preservation of foreign trade."' The position of the workman was 
a transitional one. He halted half-way between the position of the 
serf and the position of the citizen ; he was treated with kindness 
by those who injured him; he was protected, oppressed, dependent. 

22. Geographical Discovery and the Revolution^ 

BY WIIvIvIAM CUNNINGHAM 

In the latter part of the eighteenth century there was a burst 
of inventive genius in Great Britain. Many improvements were 
rapidly introduced, and the useful arts, as practised from time im- 
memorial, were revolutionised in a few years. This was no mere 
accident, but was at least partly due to the fact that the conditions 
of economic life had become more favourable to such change than 
they had ever been before. The age of geographical discovery had 
paved the way for the age of invention ; England had succeeded in 
surpassing each of the rivals who during a century and a half had 
striven with her for the commercial supremacy of the world; her 
predominance afforded the English inventors of the eighteenth cen- 
tury unexampled oppfortunities for turning their talents to account. 

Holland was no longer the carrier of the world ; her manufac- 
tures had declined in importance. In France over-centralization 
destroyed the initiative of the people and injured all branches of 
industry and agriculture. English shipping had increased, and dis- 
tant markets for national wares had been opened. The East Indies 
were willing to accept unlimited supplies of cotton cloth; and the 
continent of Europe and the colonies of America were largely de- 
pendent on Great Britain for wooden goods; manufacturing could 
be conducted on a larger and larger scale without immediate risk of 
glutting the widespread demand by overproduction. So long as 
commerce had been organised as an intercivic affair, or on the old 
regulated lines of exclusive privileges in limited markets, there 

^Adapted from An Essay on Western Civilization in Its Economic 
Aspects, 11, 225-228 (1900). 



THE INDUSTRIAL REVOLUTION 43 

could not have been any such stimulus to the invention and intro- 
duction of machinery as the world-wide markets naturally afforded. 

But more than this : the mines of the New World and the suc- 
cessful commerce with the East had given England the material 
means for the formation of large amounts of capital, which were 
now available for employment. There had been much admirable 
ingenuity among seventeenth centur}^ engineers and mechanics, but 
they were hampered by want of capital; their projects could not be 
carried out. In the eighteenth century London had become the 
monetary centre of the world, and it was no longer impossible to 
venture on the long and costly experiments that were often needed 
to render some mechanical improvement a financial success. We are 
not detracting from the genius of Watt or Arkwright if we say that 
they seized and made the most of opportunities, such as no other 
men had ever had before. Had they lived under the conditions 
which were in vogue in preceding centuries, both as to demand for 
goods and the supply of capital, these great inventors could only 
have enjoyed the meagre distinction which future generations accord 
to men who were in advance of their times. 

The great geographical discoveries were the result of long-con- 
tinued and conscious effort, directed to a clearly understood aim ; 
great expeditions had to be organised to sail on unknown seas and 
establish friendly relations with distant potentates. Explorers were 
forced to W3.\t on courtly patronage and royal initiative ; but me- 
chanical invention has run a different course. The coincidence of 
the two phenomena, a world-wide demand and a large supply of 
capital, enabled humble and unknown men to push on step by step; 
political prestige and elaborate organisation were not so essential 
as in schemes for colonization ; mechanical skill and personal inge- 
nuity had at last obtained their chance. The new industrial era, 
which the age of invention brought in its train, has offered a free 
field and given the greatest rewards to individual enterprise. It is 
commonly said that the physical advantage of England in the pos- 
session of enormous supplies of coal and iron side by side, have 
enabled her to out-distance her rivals, not only in commerce but in 
industry; still, the proximity and quantity of coal and iron do not 
in themselves account for her success completely ; in the case of 
such inventions as Arkwright's they do not account for it at all. 
The favorable conditions which English manufacturers enjoyed, in 
the eighteenth century, and the reliance on individual enterprise 
which had been traditional in Great Britain, were not unimportant 
factors in rendering this island the workshop of the world. 



44 CURRENT ECONOMIC PROBLEMS 

B. THE NATURE AND SCOPE OF THE REVOLUTION 
23. Technology and the Revolution* 

The Industrial Revolution was no sudden transformation of the 
structure of industry and the organization of social life. It is an 
unfortunate emphasis upon the "great inventions" and their imme- 
diate consequences which has caused us to lose sight of the broad 
scope and the varied content of the movement. This emphasis has 
too frequently conveyed the impression that the sudden appearance 
upon the scene of industrial action of several very wonderful ma- 
chines, born of the inventive genius of the great men of old, wrought 
a great change, substituting an entirely new and more efficient sys- 
tem for the archaic one which had done service before. This view 
commits the double error of regarding the movement as industrial 
and as a revolution. 

It was not industrial; for its antecedents cannot, any more than 
its consequences, be pent up in any narrow causal formula to which 
the term industrial can be properly applied. An attempt to find its 
beginning forces one into excursions into fields as complex as human 
life itself. Certainly the common-sense scheme of social values, the 
estimates placed by peoples upon their institutions, their aspirations, 
and. their instruments cannot be excluded from the catalogue of ante- 
cedents. The change in such a scheme was one of the most potent 
of the factors leading to this great movement. Clearly the mediaeval 
scheme of values would have inhibited the invention of the steam- 
engine. It would not even have permitted the consideration of the 
problem the partial answer to which the steam-engine became. For 
such a society the high values were in things of the "other world." 
To it nature was not a thing worth conquering ; if it had been, man 
was impotent to effect the conquest. Improvement in industrial 
technique demanded placing a higher value upon life in this world, 
upon the material means toward its fulness, and upon man's depen- 
dence upon nature's bounty and laws. It demanded, too, that the 
individual develop confidence in the soundness of his worldly desires 
and in his capacity to do things worth while. When an adequate 
account of this great movement is written, one of its most important 
chapters will trace the development of this new scheme of values. 

But, passing over the larger social aspects of the subject, even 
industrially the movement was hardly a revolution. This is evi- 
denced by a study of the transition from the craft to the machine 
regime. Under the former, population had been adjusted to the 

*Adapted from an unpublished article entitled "The Place of Technique 
in the Industrial Revolution." 



THE INDUSTRIAL REVOLUTION ' 45 

available supply of natural resources ; and the existing technique 
had adapted itself to both. In fact so harmoniously did the three 
fit together that the craft technique was just adequate to supply the 
customary wants of a slowly increasing population by making use 
of the whole of the available natural resources. In view of its ade- 
quacy, this technique, almost perfect, was in little danger of being 
replaced. 

However, the gradual revelation of the natural resources of the 
New World, or the "economic discovery of America," created an 
acute technical problem, whose solution promised alike individual 
fortune and social prosperity. Its significance lies in the fact that 
it disturbed the happy harmony between population, technique, and 
natural resources. Resources were all of a sudden tremendously 
increased. Being potential wealth, they promised fortune to him who 
could turn them into finished commodities. The craft technique, 
however, was incapable of handling so large an order. At best, it 
could but leave large quantities of resources untouched. Yet the 
almost infinite expansibility of human wants, particularly in view 
of the inability of population mechanically to assume a given size, 
demanded that the largest possible quantity of raw material be con- 
verted into usable goods. Consequently the problem of finding a 
new and adequate technique became one of increasing social impor- 
tance during the seventeenth and eighteenth centuries. In terms of 
an instinctive and semi-conscious struggle to solve this problem much 
of the intellectual history of these centuries becomes intelligible. 

Properly speaking, the problem included two closely related prob- 
lems, that of technique proper, and that of industrial organization. 
The first of these presented grave difficulties. The craft technique 
could, of course, suggest, and parts of it could even be taken over. 
But, for all that, its development was complete; its primary basis 
was individual skill ; and certainly in view of its present high develop- 
ment, it was impossible to establish a more adequate technique by 
a further development of human dexterity. Furthermore, the devel- 
opment of skill pointed to delicacy, quality, refinement. Since these 
were not what was wanted, the new technique had to start from new 
beginnings. Its demands were cruder than those made upon the 
older system. Its problem was to find a means of handling immense 
quantities of raw material in the rough, and of turning out large 
quantities of crude products. It involved, too, handling these masses 
rapidly, which necessitated finding a source of power other than 
human labor. The first requirement imposed the necessity of the 
exact handling of materials ; the second involved devising a scheme 
for throwing the burden of the work upon nature. The first imposed 



46 " CURRENT ECONOMIC PROBLEMS 

an understanding of the laws of quantity; this made necessary the 
development of mathematics, and rendered it a basic science of the 
new technique. The second rendered imperative a study of the 
phenomena of expansion, heat, motion, etc. ; this necessitated the 
further development of the science of physics, or natural philosophy, 
and prescribed it as antecedent to technique. How diligently and 
successfully these preliminary studies were made, the histories of 
mathematics and of physics in the seventeenth and eighteenth cen- 
turies abundantly attest. It is significant that chemistry and biology, 
which were not needed for the new technique which found expres- 
sion in the Industrial Revolution, did not receive their significant 
development until later. How closely developments in physics and 
mathematics were related to the general social movement is evidenced 
by the expression of rationalism and empiricism in the philosophy 
of these centuries, culminating in the naturalistic philosophy of the 
later eighteenth century. It is of note, too, that many of the philos- 
ophers of the period were deeply interested in mathematics, several 
making notable contributions to the subject. These sciences had to 
do the basic work, before significant technical development could 
occur. Technology had to bide its time. 

For a time the development of industrial organization distanced 
that of pure technique. Gradually England built up a foreign trade 
for its finished commodities. This was greatly increased by the 
over-seas demand. In proper economic order the larger market led 
to an increase in the size of the industrial establishment, and the 
latter, to a thorough reorganization. The object of this was to sub- 
divide tasks, and thus to reap the advantage of increased individual 
efficiency due to a more minute specialization of labor. The expected 
advantage of a decrease in costs was realized. Further it has an 
ulterior, and perhaps more permanent, effect in supplying the last 
condition necessary to the appearance of the new technique. Spe- 
cialization is nothing else than the breaking up of a production 
operation into its elements : it is a differentiation of productive acts, 
the isolation of a unit of the process. It tends to make the work of 
the laborer the monotonous repetition of a single routine act. The 
task, consequently, assumes just the form in which it can better be 
done by some mechanical contrivance, that repeats the single neces- 
sary motion, than by a laborer. It was in just this way that factory 
reorganization constantly threw off new isolated tasks and visualized 
the need of the machine. How important this is as a necessary 
antecedent of the machine is indicated by the use of the term Indus- 
trial Revolution as synonymous with factory reorganization by a 
recent writer, who_ contends that the machine was not the cause, but 
the result, of the Industrial Revolution. 



THE INDUSTRIAL REVOLUTION 47 

The very introduction of the machine led to a tendency toward 
the extension of its use. Four aspects of this tendency are note- 
worthy. First, the introduction of machines in industrial establish- 
ments is followed by a lack of harmony between the machine- work 
and the auxiliary craft-work in the establishment. Secondly, there 
is a like incompatibility between the machine-operations carried on 
in an industrial establishment and the craft-operations which are 
antecedent or subsequent to it in the industrial process. Friction in 
such cases leads to an extension of the machine system to comple- 
mentary activities within or without the factory. Thirdly, complete 
harmony, as Marx has pointed out, requires the application of the 
machine method to the making of machines. And, fourthly, the 
application of machinery to transportation demands, for anything 
more than its most meager use, a thoroughgoing localization , of 
industry and a great enlargement of the market for particular 
commodities. 

In these subsequent developments industrial organization and 
the machine technique have evidenced a constant interdependence. 
An enlargement of the market increases the size of the factory; this 
leads to a further specialization in industrial acts ; in this certain 
parts of the larger process are isolated and are taken over by ma- 
chines ; this leads to a decrease in costs and to a lower price for the 
goods ; and this leads to an enlargement of the market and to a 
repetition of the cycle. One point as well as another marks the 
beginning of this endless round ; logically there is no absolute cause 
and no absolute effect. But we must remember that as the cycle 
tends again and again to run its course, its convolutions become 
narrower; for even such a magical sequence is itself subject to the 
law of diminishing returns. Just as, if we attempt to find the begin- 
ning of the Industrial Revolution, we get lost in a complicated past ; 
so, if we look for its end, we lose ourselves in industrial change 
whose completion is not as yet. 

Great as the change in technique has been, the conquest of the 
machine has by no means been complete. To call the present system 
the machine system is to overlook the great fields which the machine 
has failed to subdue. In practically all agriculture the larger part 
of production is still under the control of the craft ; some agrarian 
work the machine has hardly touched. Professional and clerical 
work, as well as a large part of commercial work, knows as yet little 
of the machine. In country towns and small cities the crafts still 
survive. Even in the larger industrial centres the small establishment 
and handwork loom much larger in total than at first would appear. 
And even in the largest and best organized industrial establishments 
large oases, as it were, of the older system are left. It is perhaps 



48 CURRENT ECONOMIC PROBLEMS 

true that the influence of the machine reaches far beyond the physical 
fact, and that it exercises an overlordship over the habits and lives 
of all. But this overlordship is partial and incomplete. The lives 
and habits of the great majority are still more immediately affected 
by the older craft which directly affects their work than by the influ- 
ence of the newer and more brilliant technique. 

24, The Comprehensiveness of the Revolution^ 

BY J. H. CI.APHAM 

No region of Europe remained altogether unaffected by that long 
series of economic developments which has changed the face and 
profoundly affected the structure of modern society. It was no 
mere industrial revolution ; its story is not a list of inventions or a 
biography of inventors. Nor is it simply the story O'f capital and 
capitalistic production. Side by side with mechanical invention, the 
rising power oi capital, the extension oi economic freedom, and the 
expansion of international trade went an astonishing growth in pop- 
ulation and a partial introduction of the methods and results of exact 
science intO' economic affairs. The distinctive mark of economic 
history during this period is to be found, not in any change or group 
of changes, but rather in the coincidence of many types of change 
and the rapidity with which some of these types developed. Every- 
where there was movement, but the causes of the movement were 
infinitely varied. 

The whole eighteenth century had been an age of steady indus- 
trial development and of great commercial activity. Intercourse 
among tlie nations was more frequent and more free than ever be- 
fore. The more or less scientific and comparative study of natural 
resources was now no new thing. Imitation of superior foreign 
methods in agriculture, commerce, and the arts, was keenly pur- 
sued. There was an accelerating accumulation of capital. Banking, 
the necessary "prerequisite to investment and the organ of highly 
developed commerce, had made conspicuous progress. 

Trade was cutting its own channels, wherever Government would 
permit. In the more advanced countries it had refused, long before 
the middle of the eighteenth century, to confine itself to fairs and 
markets, after the mediaeval fashion. It had become an everyday 
matter, had ceased to be a thing of times and seasons. 

A widespread care for the improvement of internal means of 

^Adapted from chap, xxiii, "Economic Change," in A Cambridge Modern 
History, X, 727-739 (1907). 



TEE INDUSTRIAL REVOLUTION 49 

communication, combined with an ever-growing international trade, 
had quickened the pulse of economic life. In Holland, Italy,«and 
even bankrupt France, the work went on. In Great Britain the task 
of improving river navigation, reconstructing roads, and cutting 
navigable canals was in full swing in the seventies. Because of 
excess of tolls elsewhere, Britain alone was able to miake full use of 
the work of the road and canal builders. 

England exemplified the close connection which must always 
exist between improvement in the means of transport, the concen- 
tration of population, and a progressive agriculture. Where the 
cultivator works only to supply his own needs he rarely escapes from 
the crushing compulsion of traditional methods. The demand of 
the town and roads are essential if there is to be rapid movement on 
the land. In England the growth of London, to which most of the 
new roads led, furnished a main driving force. Decline in com- 
mon field husbandry was associated in Great Britain with free and 
rational methods and with spontaneous agricultural progress. 

The familiar series of revolutionary inventions towards the close 
of the century fell upon prepared soil. In all the western nations 
there existed some mining and manufacturing on a large scale, and 
many trades in which the hand-workers were tO' a considerable ex- 
tent dependent 011 the capitalist employer. Large and small indus- 
trial enterprises were everywhere encouraged by the governments. 
The progress in organization along industrial lines was due mainly 
to the fact that industrial establishments worked for export and so 
were brought under the influence of a commercial system already 
organized on capitalistic lines. 

A right instinct has selected the invention of spinning machin- 
ery and the perfection of the steam-engine as the chief industrial 
events of the later eighteenth century. The first led to the reor- 
ganization of what had long been the greatest group of industries ; 
the second furnished motive power for both new and old mechanical 
processes. But they were only the most important links in a long 
chain of improvements which freer industry, increasing skill and 
capital, expanding commerce, and a more scientific handling of 
technical problems, introduced into various branches of manufac- 
ture. In almost all branches of industry England evolved and ap- 
plied fresh methods of production. Of great significance for the 
general progress of manufacturing was the increased production of 
raw iron. Of even greater significance was the establishment, dur- 
ing the first forty years of the nineteenth century, of mechanical en- 
gineering as the organized capitalistic industry, upon which all other 
industries were beginning to depend. 



50 CURRENT ECONOMIC PROBLEMS 

The cotton trade occupies an unique position in the general move- 
mie»t. It was young ; in the eighteenth century its various parts had 
been but imperfectly organized ; and, consequently, it was adapt- 
able. The wool-working trades on the contrary were old, highly 
organized, and in certain districts most conservative. It is in no 
way surprising therefore that machinery and steam were more slow- 
ly introduced in them than in the cotton trade. Wool and flax and 
cotton spinning on the wheel died as the machine gained ground. 
Cotton, an exotic, had never ibeen spun extensively outside the 
actual manufacturing districts. As a result the work passed much 
more quickly than that of spinning wool into the mills. 

In fact few trades remained untouched by the general advance 
in technique and the movement towards a more capitalistic organi- 
zation. To the steady improvement of manufacturing processes 
were added the new and expensive motor power, better and more 
complex machines, and the new knowledge of the natural sciences. 
Trades ancillary to those of spinning and weaving, such as calico- 
printing, bleaching, and dyeing, were refashioned. Machinery and 
chemistry began to influence the ancient and conservative crafts of 
tanning and leather-working. In pottery-making, in printing, in 
brewing, in glass-making, and in a score of other industries, methods 
were revised and the scale of operations for the individual firm ex- 
tended. The power-driven machine took hold even of simple crafts 
like carpentry and shoemaking. In coal-mining the combined ef- 
fects of the new power, the new needs, and the new knowledge were 
conspicuous. It was in the mines that steam had first been used 
for pumping. Yet all these things were but small beginnings com- 
pared with the developments of the later nineteenth century. 

The system of transportation consequent upon the changes men- 
tioned was not developed until well in the nineteenth century. Turn- 
pikes tended to become more numerous and to be better laid and 
better graded. Work on harbors and estuaries and docks was un- 
dertaken concurrently with that on roads. Canals were constructed. 
The Napoleonic wars witnessed the beginnings, the peace the utili- 
zation of steam transport both on land and sea. It was in the year 
of W^aterloo that a steamer first made the passage from London to 
Glasgow. Yet progress was slow. In fact the second quarter of 
the nineteenth century was not really an age of steam navigation. 
On land a more real and rapid revolution occurred ; but it remained 
incomplete in the early forties. The railway found the reform of 
the old means of transport still unfinished. The electric telegraph, 
which has joined with the railway to create the modern market, had 
hardly passed the experimental stage; and the short-sighted critics 



THE INDUSTRIAL REVOLUTION 51 

who could treat the railway as a mere nuisance or a novel luxury 
had but recently been silenced. 

25. The Significance of the Revolution'' 

BY GRANT ROBKRTSON 

The New England must be sought in Lancashire and the West 
Riding, in the coal-pits of Durham, Northumberland, and South 
Wales, in the Black Country and the Potteries. The industrial town 
partly creates, is partly created by, the industrial area. The division 
of labor, the concentration of population, followed inevitably the 
localization and distribution of the raw material of manufactures. 
Men and women, more and more penned into the towns, are depend- 
ent for their earnings, not on the sun and the rain, the soil and the 
seasons of the home land, but on the brains of engineers, on the com- 
mercial capacity of capitalists, on imports from East and West, on 
the bowels of the earth, and on specialized skill and mechanical 
powers. Three things they must have or perish — the raw material 
of their trade, food, and expanding markets. Every year the appli- 
cation of machinery and motor power stimiulated enterprise on a 
large scale, and increased the profits of scientific organization. Every 
new invention facilitated the rate at which the total output could 
be increased, while it demanded a corresponding organization for 
distribution, exchange, and consumption. The object of the manu- 
facturer was to create and control markets and make their consump- 
tive capacity as elastic as his capacity to produce. England as "a 
workshop for the world" involved a world ready to absorb the pro- 
ducts of the workshop, and the crux of the problem did not lie in 
the certainties of production, but in the potentialities of exchange 
and consumption. Hence the new economic data necessitated the 
rewriting of old and the writing of new chapters to the theory of 
Political Economy, and the school of Ricardo is born out of the 
school of Adam Smith. The centre of political gravity slowly shifts 
with a shifting of the centre of economic gravity. The political and 
economic interests of a vast class of industrial workers and consum- 
ers, divorced from the land and linked with the capitalist and manu- 
facturing entrepreneur, became more and more opposed to the inter- 
ests of the landowner. 

By 1785 in our agricultural economy the results had cut sharply 
into the quick. Farming on a large scale, the increasing application 

"Adapted from England under the Hanoverians, 328-346 (1912). 



52 CURRENT ECONOMIC PROBLEMS 

of agricultural science, the consolidation of estates, and the enclos- 
ures, had combined to dislocate, and in some cases extinguish alto- 
gether, the yeoman and the cottager of the old order. By 1800 there 
was a marked diminution of the number of the small landowners 
and a steady disappearance of the village community as a coopera- 
tive organization for the cultivation of the soil. Of this revolution 
the evolution of the "free-hand," the landless laborer working for 
wages, was a direct consequence. A new landed interest was in 
process of creation. Its chief function was to provide more and 
more food; its chief object to reap the profits of its combined duty 
and interest. Goldsmith's Deserted Village written in 1770, and 
the Corn Law of 1773, conveniently mark a point of departure. 
The legislature, controlled by the landed classes, tried to make Eng- 
land self-sufficient. As population increased the margin of cultiva- 
tion was forced down and prices went up. The need for increased 
supplies could, under the law O'f diminishing returns, be met only 
by increased cost of production. The rise in rent kept pace with 
the rise in prices to the landlord's gain ; but the problem of pauper- 
ism, rooted in low wages and high prices, yearly became more for- 
midable. The result was the formulation of new fundamental prob- 
lems of government. Can agricultural science, aided by Legisla- 
tion, procure the necessary supply of food from home resources? 
In the national economy which is the more important, agriculture 
or manufactures? Which is socially the more beneficial, cheap food 
or a lower margin of cultivation and higher rents? Is the landed 
interest or the industrial interest to have the deciding voice in poli- 
tics? 

The new^ industrial interest was coming to rest upon a new social 
economy. Since 1750 there had been a vast increase of capital. The 
political expansion of the empire, the new markets across the seas, 
and the development of colonial possessions precede the Industrial 
Revolution. Because of the freedom of England from invasion, the 
country was spared the periodic devastation of fixed capital, and the 
hindrances to accumulation that invasion brought with it. The 
character of our citizens and the conditions of the epoch combined 
to focus the energies of the race on the creation of wealth, and the 
openings for profitable investments in agriculture, industry, and 
commerce put a premium on saving. We can broadly measure the 
increase in wealth by the fact that the financing of the agricultural 
and industrial revolution, and of the colossal eighteenth century 
wars, was accomplished from British resources alone. 

The "capitalist" in the strict economic sense w^as no new appari- 
tion. Nor was industry working on a capitalistic basis new. What 



THE INDUSTRIAL REVOLUTION 53 

is new is, first, the capitalist entrepreneur, primarily a manufacturer, 
not a moneyed mian engaged in commerce; secondly, the growth of 
a class of capitalist entrepreneurs ; thirdly, the gradual domination 
of industry by that class ; and, fourthly, the type of industrial organ- 
ization that he creates and the scale on which he applies it. To 
Adam Smith a "manufacturer" was still a workman, working with 
his own hands in his own home or workshop, with his own tools. 
The manufacturer oi the Industrial Revolution is the modern master 
who provides capital, owns his mill or factory, together with the 
machinery and tools provided for his "hands,? pays these "hands" 
wages, and creates and maintains a market. 

With the new capitalist is born the new industrial proletariat, 
that ever-increasing army of men and women who are wage-earners 
and are a new stratum in the economic world. The Revolution that 
dissolved the link between the peasant and the soil forged the bond 
that chained the wage-earner to the town. Swollen by the dislocated 
peasantry, by their own power tO' reproduce themselves in obedience 
to the increasing demand of capital and science for human hands 
and bodies, they have come to stay and to create another England. 
The slow establishment of a reserve of labor that can be called into 
the working line when trade requires it, and be thrust back when 
it is slack, the problems of unemployment and the unemployable, are 
not the least of the formidable enigmas forced on humanity by the 
wage-earner and the Industrial Revolution. 

Any picture grouping the features in clear-cut symmetry would 
be false to the facts. In different trades, in different areas, under 
varying conditions and degrees of pressure, an amazing diversity, 
not uniformity, is the prevailing note of the economic phenom- 
ena. The old order did not perish at a blow. The new was not 
introduced complete by a few remarkable inventions and a group 
of organizers. The peasant was not universally divorced from 
industry nor the industrial population from the soil. But in the 
stream of tendencies and the competition between the old and the 
new every year saw one more stone in the ancient fabric dislodged, 
one more stone in the new fabric cemented. 

The face of the country was being altered. The new roads and 
the canals are made not for the traveler on pleasure bent, but to 
bring the places where men produce intO' communication with the 
centres of exchange. Mark, too, how the roads and canals more and 
more lead to and from the urban workshops, to and from the sea. ' 
From the sea the bulk of the raw material must come — to the sea 



54 CURRENT ECONOMIC PROBLEMS 

much of the finished product will go-. Commerce, like war, is an 
affair of positions to start with. England was quick to talce ad- 
vantage of its strategic commercial position. The trend of population 
is at first to the strategic and focal centres of a distributing, exchang- 
ing, bartering, and carrying trade. Then comies the revelation of 
internal resources. Geological formation underpins geographical 
configuration. From 1770 onwards a student with a geological 
map and some knowledge of the economic data of the new trades 
might predict a priori where the new industrial centres must be. In 
the whole island so bitten and fretted is the coast line that it is 
impossible to place a pin-point anywhere on the map which is more 
than sixty miles from salt water. What this means for imports and 
exports needs no exposition. By 1801 imports and exports are an 
absolute necessity of bare existence. 

The country town is either transformed by industry or it slips 
into subordination to the new towns. These are not places which 
men and women inhabit through choice, but to live in, to produce, 
to exchange, to breed in, and to die. They are stamped with the 
feudalism of industry, a feudalism seated among factory chimneys, 
warehouses, the roar and glare of blast furnaces, the undying throb 
of machinery drowning the tramp of the wearied feet of men and 
women born tired and condemned to toil. Over the new towns are 
hung the banners and scutcheon of the industrial lords. Within 
there is the dull monotony of brick and stone, sweat and grime and 
smoke, unceasing noise, the stress of competition whose cessation 
means ruin. 

The new urban race living under new conditions is a new people. 
Its pleasures, hopes, fears, needs will be different, alike from those of 
the old cities, the old mercantilism, the old agriculture. It will create 
a new type of character, frame new values, hammer out from the 
dirt and roar of the teeming hives ideals of life and government 
bound to clash fiercely with the ideals inherited from a different past. 
It will ask for new creeds ; it will demand a new economics ; it will 
need and make a new literature. The rearrangement of the ele- 
ments of society, and the regrading of classes, will bury deeper and 
deeper each day the legal framework of the old order. The prob- 
lems of national physique, motherhood, childhood, education, pau- 
perism, citizenship, happiness are old ; but restated in the terms of a 
growing industrial democracy they become new, and with every 
decade more complex, urgent, and formidable. 



THE INDUSTRIAL REVOLUTION 55 

C. LABOR AND THE REVOLUTION 
26. Labor's Willing Slaves'^ 

BY EDWIN ARNOLD 

Look at common modern existence as we see it, and note to 
v/hat rich elaboration and large degrees of comfort it has come. I 
invite you briefly to contemplate the material side of an artisan's 
existence in your own Birmingham. Let alone the greatness of 
being an Englishman, and the supreme safety and liberty of his 
daily life, what king of old records ever fared so royally? What 
magician of fairy tales ever owned so many slaves to bring him 
treasures and pleasures at a wish? Observe his dinner-board. 
Without being luxurious, the whole globe has played him serving- 
man to spread it. Russia gave the hemp, or India, or South Carolina 
the cotton, for that cloth which his wife lays upon it. The Eastern 
islands placed there those condiments and spices which were once 
the secret relishes of the wealthy. Australian downs sent him 
frozen mutton or canned beef, the prairies of America meal for his 
biscuit and pudding; and if he will eat fruit, the orchards of Tas- 
mania and the palm woods of the West Indies proffer delicious gifts, 
while the orange groves of Florida and of the Hesperides cheapen 
for his use those "golden apples" which dragons used to gUard. 
His coffee comes from where the jeweled humming-birds hang in 
the bowers of Brazil, or purple butterflies flutter amid the Javan 
mangroves. Great clipper ships, racing by night and day under 
clouds of canvas, convey to him his tea from China or Assam, or 
from the green Singhalese hills. The sugar which sweetens it was 
crushed from canes that waved by the Nile or the Orinoco ; and the 
plating of the spoon with which he stirs it was dug for him from 
Mexican or Nevadan mines. The currants in his dumpling are a 
tribute from classic Greece, and his tinned salmon or kippered her- 
ring are taken from the seas and rivers of Canada or Norway. He 
may partake, if he will, of rice that ripened under the hot skie5 of 
Patna or Rangoon ; of cocoa, that "food of the gods," plucked under 
the burning blue of the Equator. For his rasher of bacon, the hog- 
express runs daily with 10,000 grunting victims into Chicago; Dutch 
or Brittany hens have laid him his eggs, and Danish cows grazed the 
daisies of Elsinore to produce his cheese and butter. If he drinks 
beer, it is odds that Belgium and Bavaria have contributed to it the 
barley and the hops ; and when he has finished eating, it will be the 

'^Adapted from an address delivered at the Birmingham and Midland 
Institute, October 10, 1893. 



56 CURRENT ECONOMIC PROBLEMS 

Mississippi flats or the gardens of the Antilles that fill for him his 
pipe with the comforting tobacco. He has fared, I say, at home as 
no Heliogabalus or Lucullus ever fared; and then, for a trifle, his 
daily newspaper puts at his command information from the whole 
globe, the freshness and fulness of which make the news-bearers of 
Augustus Caesar, thronging hourly into Rome, ridiculous. At work, 
machinery of wonderful invention redeems his toil from servitude, 
and elevates it to an art. Is he fond of reading? There are free 
libraries open to him, full of intellectual and imaginative wealth. 
Is he artistic? Galleries rich with beautiful paintings and statues 
are prepared for him. Has he children ? They can be educated for 
next to nothing. Would he communicate with absent friends ? His 
messengers pass in the Queen's livery, bearing his letters everywhere 
by sea and land; or in hour of urgency the Ariel of electricity will 
flash for him a message to the ends of the Kingdom at the price of a 
quart of small-beer. Steam shall carry him wherever he would go for 
a halfpenny a mile ; and when he is ill the charitable institutions he 
has too often forgotten in health render him such succor as sick 
goddesses never got from Aesculapius, nor Ulysses at the white 
hands of Queen Helen. Does he encounter accident? For him as 
for all others the benignant science of our time, with the hypodermic 
syringe or a waft of chloroform, has abolished agony; while for 
dignity of citizenship, he may help, when election time comes, by his 
vote to sustain or to shake down the noblest empire ever built by 
genius or valor. Let fancy fill up the imperfect picture with those 
thousand helps and adornments that civilization has brought even 
to lowly lives ; and does it not seem stupid and ungrateful to say, 
as some go about saying, that such an existence, even if it were 
transitory, is not for itself distinctly worth possessing? 

27. The Wage-Slaves^ 

BY AI.LAN Iv. BENSON 

Poverty did not go out when steam and electricity came in. On 
the contrary, the fear of want became intensified. Now, nobody 
who has not capital can live unless he can get a job. In the days 
that preceded the steam engine, nobody had to look for a job. The 
shoemaker could make shoes for his neighbors. The weaver could 
weave cloth. Each could work at his trade without anybody's per- 
mission, because the tools of his trade were few and inexpensive. 
Now, neither of them can work at his trade, because the tools of 

^Adapted from The Truth about Socialism, 6-y. Copyright by the 
author (1911). 



THE INDUSTRIAL REVOLUTION ■ 57 

his trade have become numerous and expensive. The tools of the 
shoemaker's trade are in the great factory that covers, perhaps, a 
dozen acres. The tools of the weaver's trade are in another enor- 
mous factory. Neither the shoemaker nor the weaver can ever 
hope to own the tools of his trade. Nor, with the little hand-tools 
of the past centuries, can either of them compete with the modem 
factories. The shoe trust, with steam, electricity, and machinery, 
can make a pair of shoes at a price that no shoemaker, working by 
hand, could touch. 

Thus the hand-workers have been driven to knock at the doors 
of the factories that rich men own and ask for work. If the rich 
men can see a profit in letting the poor men work, the poor men are 
permitted to work. If the rich men cannot see a profit in letting 
the poor mien work, then the poor men may not work. Though there 
be the greatest need for shoes, if those in need have no money, the 
rich men lock up their factories and wave the workers away. The 
workers may starve, if they like. Their wives and children may 
starve. The workers may become tramps, criminals or maniacs; 
their wives and their children may be driven into the street — ^but 
the rich men who closed their factories because they could see no 
profit in keeping them open, — these rich men take no part of the 
responsibility. They talk about "the laws of trade," go to their 
clubs and have a little smoke, and, perhaps, the next week give a 
few dollars to "worthy charity" and forget all about the workers. 

D. THE NEW INDUSTRIALISM 
28. The Function of CapitaP 

BY J. DORSEY FORREST 

Before the Revolution capital had little significance except in 
agriculture and commerce. Such simple tools and machines as were 
used in manufacturing were the property of the workmen them- 
selves, and consequently had no such social importance as modern 
capital has. Except for the introduction of the great mechanical 
devices and the application of steam-power, capital could never have 
assumed the tremendous importance which it has attained. The 
function of capital, then, is the same in kind as it was before the 
beginning of machine industry, but the quantitative difiference is so 

"Adapted from The Development of Western Civilisation, 331-338. Copy- 
right by the University of Chicago (1906). 



58 CURRENT ECONOMIC PROBLEMS 

great as to constitute "capitalism" a virtually new phenomenon. 

The immensity of modern industrial undertakings necessitates 
the employment of the surplus wealth of the entire community. No 
small company of men can furnish the requisite amount of capital. 
It is demanded in such gigantic quantities that it cannot be supplied 
by the managers of industry, nor even by those more conspicuous 
capitalists who manipulate stocks and shape policies. These very 
wealthy men may own a large share of the whole ; well-to-do people 
who take no active part in business management also own a large 
share; while the better class of artisans likewise supply hundreds 
of millions of capital, especially of that floating portion which is 
supplied through the banks for the payment of their own wages and 
the purchase of materials. Modern capitalistic production is essen- 
tially co-operative. 

The wide ownership of the means of production is an indication 
of the social character of production. Practically all of the available 
wealth of society is now directed to productive uses. If a completely 
socialistic scheme could be carried out, it would be necessary, un- 
less society should confiscate all private property now held, to obtain 
the capital from those who are now furnishing it. If public bonds 
should be given to the present capitalists, it is difficult tO' see how 
the new system would differ materially from the present one. In 
short, there has been developed, along with this great industrial sys- 
tem, a banking and credit system through which all wealth not re- 
served for consumption may be made available for production. Be- 
fore the Industrial Revolution, banking was oi very minor import- 
ance. At present the enonnous banking interests of all civilized 
countries and the equally important credit arrangements by which 
capital may easily be turned into the industries which need it, make 
possible the employment of the resources of the whole society in the 
production of the goods desired by society. 

The individual is compelled to serve society in caring for his own 
interests by turning back into the productive processes much of the 
profit derived from invested capital or managerial ability. The in- 
comes of the wealthy are largely turned back to productive purposes, 
making possible the enlargement of plants, the employment of more 
laborers, the increase of production, the cheapening of prices. In 
many directions the consuming capacity of the individual, rich or 
poor, is limited. Extravagant consumption is possible to a certain 
extent, and is, perhaps, a growing evil. But the total waste of the 
rich is probably a small item which, if saved and distributed through- 
out the whole society, would be of little consequence. The chief 
use which the wealthy capitalist can make of the income of his 



ll 



THE INDUSTRIAL REVOLUTION 59 

capital is to add it to his capital and employ it in the production of 
still larger quantities of the goods of common consumption. The 
evil of the possession of great wealth lies rather in the unworthy 
social prestige and opportunity for corrupt use which its possession 
gives to the rich than in the greater amount of goods which the 
rich consume. The evils connected with capitalism should not blind 
us to the real efficiency of our present social system in harmonizing 
individual and social interests by controlling all surplus wealth in 
the interests of society. 

29. The Factory System" 

BY CARL BUCHER 

The factory system organizes the whole process of production ; 
it unites various kinds of workers, by mutual relations of control 
and subjection, into a compact and well-disciplined body, brings 
them together in a special business establishment, provides them with 
an extensive and complex outfit of the machinery of production, and 
thereby immensely increases their productive powers. Just as in an 
army corps ready for battle, troops of varied training and accoutre- 
ment — infantry, cavalry, and artillery regiments, pioneers, engineers, 
ammunition columns, and commissariat, — are welded into one, so 
under the factory system groups O'f workers of varied skill and 
equipment are united and enabled to accomplish the most difficult 
tasks of production. 

The secret of the factory's strength for production thus lies in 
the effective utilization of labor. To accomplish this, it takes a pe- 
culiar road, which at first appears circuitous. It divides as far as 
possible all the work necessary to a process of production into its 
simplest elements, separates the difficult from the easy, the mechan- 
ical from the intellectual, the skilled from the rude. It thus arrives 
at a system of successive functions, and is enabled tO' employ simul- 
taneously and successively human powers of the most varied kind — 
trained and untrained men, women and children, workers with the 
hand and head, workers possessing technical, artistic, and commer- 
cial skill. The restriction of each individual to a small section of 
the process effects a mighty increase in the volume of work turned 
out. A hundred workmen in a factory accomplish more than a hun- 
dred independent master craftsmen, although each of the latter un- 
derstands the whole process, while none of the former understands 
more than a small part of it. 

^"Adapted from Industrial Evolution, 173-176, translated by S. Morley 
Wickett. Copyright by Henry Holt & Co. (1900). 



6o CURRENT ECONOMIC PROBLEMS 

The machine is not the essential feature of the factory, although 
the subdivision of work just described has, by breaking up labor 
into simple movements, multiplied the application of machinery. Its 
application attained its present importance only when men succeeded 
in securing a motive power that would work unintermittently, uni- 
formly and ubiquitously, namely, steam. An example will illus- 
trate. In 1787 the canton of Zurich had 34,000 male and female 
hand-spinners producing cotton yarn. After the introduction of 
English spinning machines a few factories, employing one-third the 
former number of workers, produced an even greater quantity of 
thread. What is the explanation? The machine? But was not the 
former spinning-wheel a machine? Certainly it was, and a very 
ingenious one. Machine was thus ousted by machine. Or better, 
the entire spinning process had been decomposed into its simplest 
elements, and perfectly new operations had arisen for which even 
immature powers coiild in part be utilized. 

In the subdivision of work originate these further peculiarities 
of factory production — the necessity of manufacturing on a large 
scale, the requirement of a large capital, and the economic depend- 
ence of the workman. 

Finally, its large fixed capital assures tO' factory work greater 
steadiness in production than was possible under other systems. 
The manufacturer must go- on producing, because he fears loss of 
interest and shrinkage in the value of his fixed capital, and because 
he can not afi:*ord to lose his trained body of workmen. 

30. The Machine Process^^ 

BY thorste;in b. vi;bIvSn 

In its bearing on modern life and modern business, the "machine 
process" means something more comprehensive and less external 
than a mere aggregation of mechanical appliances. The civil engi- 
neer, the mechanical engineer, the mining expert, the industrial 
chemist, — the work of all these' falls within the limits of the modern 
machine process. The scope of the process is larger than the ma- 
chine. Many agencies which are not to be classed as mechanical 
appliances have been drawn into the process, and have become inte- 
gral factors in it. Wherever manual dexterity, the rule of thumb, 
and the fortuitous conjectures of the seasons have been supplanted 
by a reasoned procedure on the basis of a systematic knowledge of 



^'•Adapted from The Theory of Business Enterprise, 5-19. Copyright by 
Charles Scribner's Sons (1904). 



« 



THE INDUSTRIAL REVOLUTION 6i 

the forces employed, there the mechanical industry is to be found, 
even in the absence of intricate mechanical contrivances. It is a 
question of the character of the process rather than a question of 
the contrivances employed. Chemistry, agricultural, and animal in- 
dustries, as carried on by modern methods and in due touch with 
the market, are to be included in the modern coinplex of mechanical 
industry. 

Not one of the processes carried on by the use of a given outfit 
of appliances is independent of other processes going on elsewhere. 
Each draws upon and presupposes the proper working of many 
other processes of a similar mechanical character. Each of the 
processes in the mechanical industries follows some and precedes 
other processes in an endless sequence, into which each fits and to 
the requirements of which each must adapt its own working. The 
whole concert of industrial operations is to be taken as a machine 
process, made up of interlocking detail processes, rather than as a 
multiplicity of mechanical appliances each doing its particular work 
in severalty. The whole makes a more or less delicately balanced 
complex of sub-processes. 

Looked at in this way the industrial process shows two well- 
marked general characteristics: (a) the running maintenance of 
interstitial adjustments between the several sub-processes or branch- 
es O'f industry ; and (b) an unremitting requirement of quantitative 
precision, accuracy in point of time and sequence, in the proper in- 
clusion or exclusion of forces affecting the outcome, in the magni- 
tude of the various physical characteristics, weight, size, density, 
etc., of the materials handled as well as the materials used. This 
requirement of mechanical accuracy and nice adaptation to specific 
uses has led to a gradual enforcement of uniformity, to a reduction 
to staple grades and staple character in the materials handled, and 
to a thorough standardizing of tools and units of measurement. 
Standard physical measurements are the essence of the machine 
regime. 

Standardization has outrun urgent industrial needs and has pen- 
etrated every corner of the mechanical industries. Modern com- 
munities show an unprecedented uniformity in legally adopted 
weights and measures. As a matter of course tools and the various 
structural materials used are made of standard sizes, shapes, and 
gauges. The adjustment and adaptation of part to part and of pro- 
cess to process has passed out of the category of craftsmanlike skill 
into the category of mechanical standardization. Modern industry 
has little use for, and can make little use of, what does not conform 
to the standard. This latter calls for too much of craftsmanlike 



62 CURRENT ECONOMIC PROBLEMS 

skill, reflection, and individual elaboration, and is therefore not avail- 
able for economic use in the processes. Irregularity is itself a fault in 
any item, for it brings delay, and a delay at any point means a more 
or less far-reaching and intolerable retardation of the comprehen- 
sive industrial process at large. 

The materials and moving forces of industry are undergoing a 
like reduction to staple kinds, styles, grades, and gauges. The like 
is true of finished products. As regards the mass of civilized man- 
kind, the idiosyncrasies of the individual consumers are required 
to confo;-m to the uniform gradations imposed upon consumable 
goods by the comprehensive mechanical processes of industry. Be- 
cause of this it follows that the demand for goods settles upon cer- 
tain defined lines of production which handle certain materials of 
definite grade, in certain, somewhat invariable, forms and propor- 
tions. Standardization means economy at nearly all points of the 
process of supplying goods, and at the same time it means certainty 
and expedition at nearly all points in the business operations in- 
volved in meeting current wants. It also reduces the interdepend- 
ence of businesses to more definite terms. Machine production also 
leads to a standardization of services. 

By virtue of this concatenation of processes the modern indus- 
trial system at large bears the character of a comprehensive, bal- 
anced mechanical process. To an efficient working of this industrial 
process at large, the various constituent sub-processes must work in 
due coordination throughout the whole. Any degree of maladjust- 
ment in some degree hinders its working. Similarly, any detailed 
process or industrial plant will do its work tO' full advantage only 
when due adjustment is had between its work and the work done 
by the rest. The more fully a given industry has taken on the 
character of a mechanical process, the more urgent is the need of 
maintaining proper working arrangements with other industries. 

31. The New Domestic System^^ 

BY HERBERT J. DAVENPORT 

So long as industry held its place in the home — down, that is, to 
the close of the handicraft era — even the palace and the castle re- 
tained their share of industrial activity. Under the supervision of ^ 
the lady-mistress, the spinning maiden and the weavers were at i 
their tasks. In truth each great dame was a lady in the strict and 
early sense of the word, a bread-dispenser, the mistress of an ex- 

^^Adapted from an unpublished address entitled "The Economics of 
Feminism" (1914). 



THE INDUSTRIAL REVOLUTION 63 

tended and active and intricately organized domestic activity — a 
serious and absorbing and difficult function for which the training 
was arduous and in which, in the actual doing, the tests of efficiency 
were manifest and severe. 

But now, with the complete establishment of the typically mod- 
ern organization of industry, have arrived fundamental changes in 
the organization of the home — changes to which no adequate re- 
adjustments have as yet been devised. The flax and the hemp are no 
longer there for preparation. The spinning has migrated to the 
factory. The weaving is done by the great machines. The cutting 
and the making of garments have departed. The butter is churned 
at the creamery. More and more the bakeries are furnishing us with 
our bread. Gas and electricity leave no room for candle-making, or 
even for the filling and the care of lamps. The jam, the pickles, and 
the preserves we buy of the grocer. There are no more festoons of 
dried apples in the attic. The smoking of the ham and the bacon the 
packer does for us, along with the killing and the cleansing. There 
is no longer any leaching of ashes or boiling of soap to be done in 
the backyard. The steam laundry cleans and irons for us, and fades 
out and wears out for us, the garment which the factory has provided 
for ready use. The electric sweeper cleans our floors, the while 
that the day laborer runs it, and the dry-cleaner and the pantatorium 
care for our suits and our gowns. And the mother no longer teaches 
her children at the knee, sending them instead to the tax-paid em- 
ployee of the schools. 

And yet somehow, with all its occupations gone, the home still 
retains its exterior seeming and organization ; and somehow also is 
so busy a place that, if it conform at all to the standard and ideal of 
American life, it requires an ever-larger array of house-maids and 
nurse-girls. Still our women folk grow worn and tired with its 
burdens, and if the house-maid fails, even desperate. Ill health, 
dyspepsia, and nervous breakdown are increasingly feminine phe- 
nomena. And along with it all, a strange accompaniment, there are 
fewer and fewer children to be reared as the time of the mother 
ought to be more. Race suicide confronts our modern societies. 

It is evident that the machine industry and the cheapened proc- 
esses of production have taken away from women in large part their 
fundamental economic functions. Things have grown too cheap to 
be done by the old domestic time-consuming methods. As mere 
matters of dollars and cents production can take place in the home 
only at a cost greater than the purchase price on the market. There 
is no place for the home woman in the industrial activities of the 
present society. 



64 CURRENT ECONOMIC PROBLEMS 

But something quite other has been the meaning of the new in- 
dustrial processes for the life and the labor of men. The new ma- 
chinery has served to provide them with tools by which vastly to 
enlarge the field of their effort, and to multiply their accomplishment 
in every single field. No matter what the deficiencies in the organ- 
ization of all this new power, men have not grown idle or sluggish. 
They have not forfeited their functions, their jurisdiction, their 
aspirations, or their accomplishment. 

But the history of the race does riot indicate that to men exclu- 
sively belongs the duty or the privilege of labor, or that the present 
economic status of women is an adequate certification of progress 
in civilization. If women should not work, why should men? If 
self-respecting man must work, by what title is it now honorific to 
women to be idle? We have arrived at an unfortunate reversal of 
an earlier institution. In early society, an almost crushing amount 
of labor fell upon the female; under modern conditions among the 
fully civilized classes an unduly excessive share devolves upon the 
male. 

The explanation of the existing situation is chiefly in modern 
technology. The fault is in the failure of society to work out those 
readjustments by which a significant share in the world's work shall 
be preserved for women, either within the home or outside of it. 
When the home is losing its economic utility, it can be available for 
those men alone who, being able to afford the luxury, are disposed 
to pay the attendant price. The increasing expensiveness of the 
home under modern conditions, its restriction of function to mere 
consumption and spending, explains the progressive swerving of 
men away from it, and the derivative and increasing horde of home- 
less and childless women outside. 

Women breadwinners within the home our present American* 
life doubtless has. But of these it holds true, as of the women of 
the factory, the shop, or the street, that, although belonging by sheer 
necessity to our American life, they yet have no place in that society 
which America holds as its ideal. They are our unfortunates among 
women, in that they have not found each her man, and attached him 
to her to work for her, to shelter her from all productive effort, and 
to support her. For it is the grievous fact that the American ideal 
of reputable living denies to women the role of economic producer 
and commiserates the girl who does not marry into a life of pecuniary , 
ease; prescribes as a duty upon any self-respecting man that he 
neither offer nor enter marriage if his wife need be more than deco- 
ratively active ; and, if he fail of this, insults her with pity and him 
with contempt. 



• THE INDUSTRIAL REVOLUTION 65 

It is in the cause of motherhood that we make our protest 
against the typical home of the American ideal. The economic 
dependence of women cannot be defended by the test of children; 
they are in inverse ratio to the room for them. The poor alone can 
afford to be prolific. 

But not all housebound women would confess themselves to be 
idle. Think how absorbing and complicated the keeping of the 
home has become : its meticiilous refinement, its ornate entertain- 
ments, its furniture and bric-a-brac for dusting, its curtains for 
cleaning, its rugs for beating. Busy indeed these women will be — 
but busy in keeping busy — absorbed in the empty competition of 
modern housekeeping, in the collection of work-compelling plunder, 
in the maintenance of exhibition rooms, and in the general annihila- 
tion of comfort. The two hours' labor that should suffice for all 
rational daily needs, were there only something else to do, is devoted 
to the preparation of mayonnaise dressings or to the concoction of 
snow puddings, or to other certification of useless skill. Dishwash- 
ing, instead of coming thrice a week, comes three times a day. The 
laundry work piles up to the proportions of a nightmare. The one 
child, wearied by overdressing and spoiled by fussing care, pines for 
the forbidden joys of dirt and bare feet. Acquiescing in all this 
futility, the housewife finds enough her mere labors of supervision. 

Meanwhile, the man whose business it is to pay the bills is busy 
enough in the proqess — too busy, indeed, in making the income to 
have either the time or the taste for the spending of it. But no pity 
is due to this tired captain of industry, or this busy moiler in trade 
or finance for the burden he carries. He may, no doubt, appear to 
be a mere pack-animal in the service of his family — a weary though 
willing slave to their folly — a man solely occupied in canceling the 
bills they are busy in contracting. But he is aiming at his own glory. 
To the women, as helpless victims of the competition of display, 
the function of spending has been delegated. Institutionally the 
wife is a mere agent in the process. Not only must she, to the de- 
gree that her lord is wealthy or is aping the possessors of wealth 
avoid whatever remnant of useful activity is open to her, lest the 
suspicion of need should attach to shame him ; but also, by waste and 
lavish outlay, must she place upon exhibit and in continuous view 
the wealth and achievements of her master. In this process of 
certifying the fact of his financial prowess by seeming to spend 
upon herself, she seems to afford both motive and excuse for gaining 
the wealth. Such glory as belongs to her part is in being the wife 
of such a one, and in the delusion that he is making the money for 



66 CURRENT ECONOMIC PROBLEMS ■ 

her spending, rather than that she is spending it for his glory. The 
personal relation easily obscures the larger meanings of the institu- 
tional fact. 

E. THE EXTENSION OF INDUSTRIALISM 
32. The Competitive Victory of Western Culture^^ 

BY JAMIJS BRYCE; 

What is it that the traveler sees today in India, in Africa, in the 
two Americas, in Australia, in the isles of the Pacific? He sees the 
smaller, weaker, and more backward races changing or vanishing 
under the impact of civilized man; their languages disappearing; 
their religious beliefs withering ; their tribal organizations dissol- 
ving; their customs fading slowly away. 

From the blending of others with immigrants streaming in, a 
hybrid race is growing up in which the stronger and more civilized 
element seems fated to predominate. In other cases people too 
large and powerful to lose their individuality are nevertheless begin- 
ning to be so affected by European influences as to find themselves 
passing mto a new circle of ideas and a new set of institutions. 
Change is everywhere, and the process of change is so- rapid that 
the past will soon be forgotten. It is a past the like of which can 
never recur. 

There is one other aspect of the present age of the world that 
has a profound and novel meaning for the historian. The world is 
becoming one in an altogether new sense. More than four centuries 
ago the discovery of America marked the first step in the process 
by which the European races have now gained dominion over nearly 
the whole of the earth. The last great step was the partition of 
Africa a little more than twenty years agO'. 

Now, almost every part of the earth's surface, except the terri- 
tories of China and Japan, is either owned or controlled by five or 
six European races. Eight Great Powers sway the political destinies 
of the globe and there are only two other countries that can be 
thought of as likely to enter after a while into the rank of the Great 
Powers. Similarly a few European tongues have overspread all the 
continents except Asia, and there it seems probable that those Euro- 
pean tougues will before long be learned and used by the educated 
classes in such wise as to bring those classes into touch with Euro- 
pean ideas. It is likely that by 2000 A. D. more than nine-tenths 
of the humian race will be speaking less than twenty languages. 

"Adapted from an address delivered before the International Congress 
of Historical Studies, London, May. 1913. 



THE INDUSTRIAL REVOLUTION 67 

Already there are practically only four great religions in the 
world. Within a century the minor religions may be gone; and 
possibly only three great faiths will remain. Those things which 
are already strong are growing stronger; those already weak are 
growing weaker and are ready to vanish away. Thus, as the earth 
has been narrowed through the new forces science has placed at 
her disposal, and as the larger human groups absorb and assimilate 
the smaller, the movements of politics, of economics, and of thought 
in each of its regions become more closely interwoven with those 
of every other. Finance, even more than politics, has now made 
the world one community, and finance is more closely interwoven 
with politics than ever before. 

World history is tending to become one history, the history no 
longer of many different races of mankind occasionally affecting 
one another's fortunes, but the history of mankind as a whole, the 
fortunes of each branch henceforth bound up with those of the 
others. 

33. The Economic Conflict of Western and Primitive Culture 

BY FRIEDA S. MIIvLER 

Not once, since the Turks captured Constantinople, has European 
civilization been threatened by an external force. Yet, since that 
time, and by its own volition, it has been in constant contact with 
non-European peoples in their own countries. Clearly the West was 
not summoned by China to establish an open-door policy, and the 
American Indians invited no discovery. 

The motive to European expansion may afford some clue to its 
possible effect. Religious persecution, political differences, scientific 
curiosity, all these have played their part ; but the persistent aim has 
always been economic gain. The lure of the guinea alike led Spain 
to America, Portugal around the African cape, England to India 
and South Africa, and Russia across the snows to the walls of China. 
Pecuniary profit has been the lodestar that has led the West to the 
East. This motive is the open sesame to an understanding of the 
business of the Occident in the Orient. It means, above all, that 
the "new" countries, possessed of their tremendous resources, which 
can be unlocked only by the white man's magic key of the machine 
process, are to be used for the white man's profit. In its extreme 
form, before civilization softened the formalities, it meant for the 
natives slavery and transportation to distant lands. But such prac- 
tices have been succeeded by a strict legal and moral code which 
regulates the contact of white man and native. The white man may 



68 CURRENT ECONOMIC PROBLEMS 

content himself that his ritual has proved itself in the Western 
world, and even flatter himself that it is the beet he has to offer the 
native. His long personal use should enable him to guarantee its 
efficacy. Now what the white man wants first of all is land. This 
he sets about obtaining legally. He proffers the native beads or a 
knife in exchange for his title. When the native chief accepts, as 
he is likely to do, by this act which marks an exercise of his own 
free will and judgment, he has contracted away the lands of his 
tribe. No one has been injured; since the act was voluntary, the 
agreement extended to both parties, and compensation in full was 
rendered. The parties, therefore, being legally bound, must be held 
to the performance of their obligations under the law of contracts. 

Having gained control of the soil, which may mean railroad and 
mining concessions in China, gold mines in South Africa, or sugar, 
plantations in Hawaii, and having thus in his hands the possibilities 
of pecuniary gain, the white man's next problem is to find means of 
developing this potential wealth. Again the conventions of the 
Western world are required to prove their efficacy. Either dignity 
of labor or freedom of contract can be made to fit the case. On the 
one hand there is work in railroad building, mining, herding cattle, 
or what not, that requires the doing. On the other hand there are 
hordes of able-bodied natives who are not productively employed. 
Proper consideration for the dignity of toil, therefore, leaves the 
white man no alternative but to devise a system for securing the 
labor of the savage. A head tax may be levied which must be paid 
in money. Or a tax may be placed on the native which he can dis- 
charge in work. More easily, again using the magic wand of con- 
tract, the savage may be gotten in debt ; and surely he must be held 
responsible for obligations voluntarily assumed. The result is the 
permanent establishment of the wages system. 

The nature and consequences of such overlordship can be easily 
appreciated. Economically the native is regarded as a convenient 
instrument for causing success to attend the white man's venture. 
The noneconomic effects are also interesting and far-reaching. The 
coming of the white man not only makes a wage-slave of the native, 
but demoralizes him socially and spiritually. Tribal life is broken up 
when sufficient lands for hunting or communal agriculture are no 
longer available. With it comes the end of the power of chiefs and 
priests, the latter still further undermined by the assiduous efforts 
of Christian missionaries to convince the "heathen" of the wickedness 
of their leaders. Moreover, the native's observation of the white 
man's mode of life, with its impunity from tribal taboos and dis- 
regard of tribal sanctions, destroys their validity for him. Finally 



THE INDUSTRIAL REVOLUTION 69 

the whole primitive system of control under which he has lived 
suffers shipwreck/* 

All this but makes the native a more pliant instrument, since he 
cannot reconstruct a new system of values to fit the new situation. 
He does not understand the white man's object, or see to what place 
this foreign system assigns him. His mental attitude is quite external 
to the real nature of the system which is closing in about him. 
Therefore he has not the recourse against it possessed by the wage- 
workers of Western countries, who, whatever their weakness, still 
sense the drift of events that is involving them. This inferior posi- 
tion is made permanent and definite by the fact that most of the 
native races which Western civilization has encountered can not be 
assimilated. It is not the purpose of Europeans, even were it possible, 
to educate primitive races to a point where they could reap the profit 
of the development which their countries are undergoing. 

But the results of such a policy, naturally enough, are not limited 
to the countries affected. To assure the pecuniary success which is 
the object of colonial expansion, trade is necessary. If a colony is 
cut off from communication with the Western world, rapid pecuniary 
gains cannot be made. The settlers must supply their own needs, 
thus establishing a self-sufficient economic system. But it is only 
as a part of a much larger industrial entity that the potential re- 
sources of the colony may be most advantageously utilized. A dis- 
position of the surplus abroad gives vast differential _gains. The 
promoters, therefore, will strive to make the colony a part of the 
existing industrial system. In course of time the industrial aris- 
tocracy will live under a social system and possess a civilization like, 
that of the Western world. The natives, too, will, live under such a 
system, but as a permanent proletariat. Thus the West with its cul- 
ture is reaching out to grasp lands held by primitive peoples, and to 
reduce its complex and different scheme of life to its own system of 
values. 

But the process must inevitably react upon the structure of 
Western society. The spirit of colonial life must influence the 
mother-country. Colonial pecuniary interests must find their part 
in Western politics. The easier life of the tropics must have its 
telling effect on character, and hence affect the morale of the home 
people. The sense of empire, too, exercises a peculiar psychological 

"Compare the plaint of the natives in Rhodesia, as voiced by Sir Richard 
Martin, in his official report. "The natives practically said, 'Our country is 
gone and our cattle; we have nothing to live for. Our women are deserting 
us;_ the white man does as he likes with them. We are the slaves of the 
white man ; we are nobody and have no rights or laws of any kind.' " — 
Hobson, Imperialism; A Study, 281, note. 



70 CURRENT ECONOMIC PROBLEMS 

influence which cannot be analyzed. It, also, threatens the home 
wage-worker with competition of cheap foreign labor. Such are 
the results of the competition of Western and primitive culture, 
when the contest is fought on the territory of the latter, and the 
weapons are all of Western fashioning. 

34. The Export of Speculative Capital and War^^ 

BY AIvVIN S. JOHNSON 

Let US look somewhat closely upon the structure of capital as an 
economic force. We shall find that it embraces two elements differ- 
ing widely in character. The one, which we may denominate capital 
proper, is characterized by cautious calculation, but a preference for 
sure, if small, gains to dazzling winnings. The other, which we 
may call speculative enterprise, is characterized by a readiness to 
take risks, a thirst for brilliant gains. 

Capital thrives best in a settled order of society, where the risks 
of loss are at a minimum. It accepts favors from government, to be 
sure, but politics is no part of its game; peace and freedom from 
disturbing innovations are its great desiderata. Speculative enter- 
prise, on the other hand, thrives best in the midst of disorder. Its 
favorite field of operations is the fringe of change, economic or 
political. It delights in the realm where laws ought to be, but have 
not yet made their appearance. To control the course of legal evolu- 
tion, to retard or divert it, are its favorite devices for prolonging the 
period of rich gains. Politics, therefore, is an essential part of the 
game of speculative enterprise. 

At the outset of the modern era, speculative enterprise quite 
overshadowed capital proper. Colonial trade, government contracts, 
domestic monopolies were the chief sources of middle-class fortunes. 
But with the progress of industry, slow, plodding capital has been 
able steadily to encroach upon the field of enterprise. In our own 
society the promoter of railway, and public utilities, the exploiter of 
public lands, the trust organizer, are as prominent relatively as in any 
modern nation. Qantitatively, however* their interests are greatly 
inferior to those of the trader, manufacturer, banker, small investor, 
and the farmer, to whom a 10 per cent return is a golden dream and 
a 20 per cent one a temptation of the Evil One. 

In a new country of vast natural resources there is sufficient 
scope for both speculative enterprise and capital proper. The United 
States has been such a country. There was easy money enough for 

^^ Adapted from "The War — By an Economist," in the Unpopular Review, 
II, 420-428. Copyright (1914). 



THE INDUSTRIAL REVOLUTION 71 

all men of shrewdness and resolution possessed of the necessary 
initial stake — public forests to be leveled, railways to be built or 
wrecked, trusts to be organized, cities to be provided with public 
utilities. But, in view of our changing attitude, this easy money 
appears to be in danger of being locked up. Already we are begin- 
ning to hear murmurs that, in view of the popular hostility to wealth, 
it will be necessary for American capital to look for foreign invest- 
ments. Not foreign investments in England, France, and Germany, 
where government is efifiicient and capital proper prevails, but foreign 
investments in the undeveloped countries, in a Land of the Morning, 
"east of Suez." 

The progress of modern industrial society, with its parallel devel- 
opment of the art of government, tends to the exclusion of specula- 
tive capital, and its concentration in the tropical and subtropical 
belts. In the older societies this process has been in operation for a 
considerable time. For generations British citizens have been taught 
to look to Asia, Africa, and America for sudden wealth. Although 
Germany had a slower start, the efficiency of government has rec- 
ommended new countries to those looking for brilliant gains. In a 
generation much of our speculative capital will be employed in 
colonial exploitation. 

Capital, it is often said, knows no such thing as patriotism. This 
may be true of the cautious, colorless capital of industry and finance. 
But an intense patriotism is avowed by J. J. Hill, by the DuPonts, by 
the Guggenheims. Most intense of all is the patriotism of the capi- 
talist whose interest lies in the twilight zone of the barbaric belt. 
Purer expressions of concern for America's future than those now 
issuing from the lips of concessionaries in Mexico you never hear. 
We are all moved by the grandiose African dream of Cecil Rhodes : 
"all red" — i.e., British — a British heart within every black skin from 
the Cape to Cairo. The case is typical of the capitalist speculator 
abroad. By interest the concessionary capitalist is a patriot. He 
needs his country in his business. But this is no impeachment of his 
patriotism. His type is reckless and therefore idealistic. His private 
interests become submerged in his imperialistic ambitions. Patriot- 
ism has always burned more brightly in border provinces than in 
the heart of the national territory. It is natural, then, that patriotism 
should be still more intense in those extensions of the national 
domain represented by permanent investments abroad. 

Now patriotism compounded with financial interests usually pro- 
duces detestation for the corresponding alien compound. Speculators 
in South America and the Orient meet their rivals from other 
nations and hate them heartily. Those speculators are the nerve 



72 CURRENT ECONOMIC PROBLEMS 

ends of modern industrial nationalism, and they are specialized to 
the work of carrying sensations of hate. For the present we have 
few nerves of this kind. They have conveyed to us only a vague 
impression of the uneasiness felt by England and France over the 
German advance in the colonial field. And German speculators, 
thwarted in their designs by the English and French, have con- 
tributed to the popular feeling that Germany must fight for what 
she gets. 

The capitalist speculator, even at home, enjoys a power over the 
popular imagination and a political influence quite incommensurate 
with the extent of his interests. When the seat of his operations 
is a foreign territory, whence flow back reports of his great achieve- 
ments — achievements that cost us nothing, and that bring home for- 
tunes to be taxed and spent among us — his social and political influ- 
ence attains even more exaggerated proportions. And this is the 
more significant since his relations with government are concentrated 
upon the most sensitive of government organs, the foreign office. 

When diplomatic questions concerning the non-industrial belt 
arise, and most diplomatic questions concern this belt, the voice of 
the concessionaries is heard at the council of state. The voice is 
the most convincing because of the patriotism that colors its expres- 
sion of interest. More important, the ordinary conduct of exploita- 
tive business in an undeveloped state keeps the concessionary in con- 
stant relation with the consular and diplomatic officers established 
there. In a sense such officers are the concessionary's agents, yet 
their communications to the home office are the material out of which 
diplomatic situations are created. 

It is accordingly idle to suppose that exploitative capital in for- 
eign investments weighs in foreign policy only as an equal amount of 
capital at home. In view of the conditions mentioned, a small in- 
vestment may prove a great menace to the peace of nations. For 
years Germany, Russia, England, and France have been brought to 
the belief that something very vital turns upon the control of the 
Land of the Morning. Indeed, the whole civilized world has been 
seduced into accepting this belief. Yes, something very vital for ex- 
ploitative capital. Out of such delusions spring wars. 

It is the interest of exploitative capital that makes the Morning 
Tand, Mexico, China, and Africa rotten stones in the arch of civihza- 
tion. But for exploitative capital, these regions might remain back- 
ward, socially and politically: this would not greatly concern any 
industrial nation, except so far as it responded to a missionary im- 
pulse. The backward states, however, afiford possibilities of sudden 
wealth ; and, since this is the case, they must attract exploiters, who 



THE INDUSTRIAL REVOLUTION 73 

must seek and obtain the backing of their home governments, with 
resultant international rivalry, hostility, war. 

In a short time there will be one new element in the situation, 
new, at any rate, to us. In a generation our strong men of specula- 
tive finance will be established in the undeveloped countries ; conces- 
sions will figure conspicuously among the items of our national 
wealth. The foreign contingent of our capital will join in the battle 
for exploitative advantages. And who shall say that our country 
may not be a protagonist of the next great war? One-half of i per 
cent of our capital just failed of forcing us to subjugate Mexico. 

If we could confidently predict the industrialization of the back- 
ward countries, we should be able to foresee an end of this one most 
fruitful of all sources of international strife. But China will not 
be industrialized for a generation at least; and many generations 
must elapse before the tropics are concession-proof. Accordingly 
the one hope for universal peace would appear to lie in the possibility 
of divorcing, in the popular consciousness, the concessionary interest 
from the national interest. 

The concession and the closed trade are the fault lines in the 
crust of civilization. Solve the problem of the concession and the 
closed trade, the earth hunger will have lost its strongest stimulus, 
and peace, when restored, may abide throughout the world. 



Ill 

. SOCIAL CONTROL IN MODERN INDUSTRIALISM 

Our historical study has shown that our "system" as a whole is in process 
of development. But novelty and goodness are not one; the newer society 
because of its newness is not perforce better than the old; our world, though 
transformed, has not of necessity become a better world in which to live. 
Movement there always is ; but movement may or may not mark an advance. 
This possible antithesis between development and progress raises perhaps 
the most important of all current problems, for in its terms other problems 
must find their "solution." Should society allow its development to take its 
"natural course," or should it attempt to control it? 

No absolute answer can be given to so universal a question. If the na- 
tural course gives evidence of being the path we would mark out, obviously 
we should keep our hands off. If for such a reason laissez faire is deliber- 
ately chosen, paradoxical as it seem, it becomes merely a convenient instru- 
ment of social control. But if the "system is going awry," what shall we do? 
Just as obviously we should, to the extent of our intelligence and power, 
attempt to control the process. 

But can we control so complex and many-sided a thing as social develop- 
ment ? . Unfortunately to this question we cannot give an unqualified affirma- 
tive. Many social "forces" are beyond our ken and power; others, of which 
we have some knowledge, cannot be reached by any contrivances which we 
have yet perfected ; given programs promising definite results have the per- 
versity to produce undreamed of complications ; and immediate consequences 
have fallen into the disagreeable habit of distracting our attention from more 
ultimate and important results. It seems, therefore, that the wholesale pre- 
scription of "remedies" and the amateurish tinkering with parts are likely to 
prove dangerous. Yet, if we are sufficiently conscious of the limitations un- 
der which we are working, we can do something toward directing the move- 
ment. We know something of the elements involved ; we have had much 
experience that should stand us in some stead ; and we have evolved some 
very remarkable agencies of control. If we proceed cautiously, make our 
programs flexible, and quickly change our procedure to meet the unexpected 
contingencies which are inevitable, there is reason for faith in our ability 
eventually to accomplish much. If we essay the task, we shall need a knowl- 
edge of the means of control, a theory of the use of these means, and a con- 
sciousness of the "end" for which they are used. Let us consider these in 
turn. 

Even if our desires be quite modest, they will necessitate the use of 
numerous and varied means of control. The changes which we wish to effect 
may be in the structure of society, in institutions, in activities, or in values ; 
they may call for immediate and mechanical action or they may necessitate 
slow and gradual adaptations; they may affect almost the whole of society 
or may immediately touch only a single aspect of life. For these and a 
myriad other uses instruments of social control are available. The state can 
be used to secure quick mechanical changes; the school and the church can 
be used slowly to effect more gradual and organic adaptations ; the labor union, 

74 



PROBLEM OF SOCIAL CONTROL 75 

by sharp, incisive action, can immediately further the interest of a group; 
the interest of a like group may gradually be advanced by a voluntary asso- 
ciation using more peaceful methods ; press and public opinion can reach 
a large part of society; occupational associations and codes of ethics can 
exercise a control over particular groups ; and convention and tradition, 
through their prohibitions and inhibitions, can effectively direct the lives and 
activities of the individuals. Each of these agencies in its own way can be 
used to make the "system" somewhat different. Because of the multiplicity, 
variety, and efficiency of these agencies — despite the gravity of our ignorance 
— we could not escape social control if we would. 

Our theory of the use of these "forces" has been very gradually built up, 
and as yet is far from complete. During most of the nineteenth century, when 
"the country was in a stage of increasing returns," when self-reliance was 
dominant, and when men dared not meddle with the rising machine-system 
which they very imperfectly understood, the dominant theory was that of 
laissez-faire. This theory overlooked entirely the influence exerted by 
agencies other than the state, as well as a large number of active functions 
performed by government, such as the protection of property and the main- 
tenance of contract. At present the hold of individualistic theory is weaken- 
ing. The frontier is gone ; we are confronted by the grave problems of a 
mature society ; we are less prone to attribute success or failure to personal 
merit or demerit ; and we talk of "social conditions" and "inequality of oppor- 
tunity." All of this inclines us to depend more upon authority, and threatens 
a radical extension of state activity. But there are potent checks upon this 
attitude. The interpretation of our constitution still proceeds from individ- 
ualistic assumptions ; the pecuniary organization of society still gives great 
weight to the views of the owners of "vested wealth" ; and in many places 
a spirit of abandon in legislation is doing much to discredit state interference. 
But we are quite consciously coming to complement our theory of the prov- 
ince of government with a theory of the use of other agencies of control. 
For we are learning that we must pay for what we get, that legislation can- 
not produce Utopias, that good is achieved rather than acquired, and that 
the less conspicuous agencies of control are as certain as they are slow. 

A consciousness of the end for which these means are used is hardest for 
us to acquire. But, difficult as the task is, we must realize that, if we attempt 
social control we must know what we are about; we must have a tentative 
goal; we must appreciate the "end" at which we are aiming. To achieve 
that end our proposals must fit together into consistent programs; the in- 
struments of control which we use must complement each other. This does 
not mean that there must be no elements of antagonism in the system, but 
rather that there must not be the spoiled work which comes from the con- 
fused counsel whose origin is in dealing with problems in isolation. Con- 
sciousness of the "end" also involves looking beyond immediate proposals. 
Beyond conflicting proposals, seemingly unimportant, lie powerful social 
theories, quite contradictory in the kind of societies they tend to produce. 
In many problems, therefore, the ultimate issue is between different systems. 
Shall our ideal be that of a personal and industrial feudalism, an individualistic 
America of the nineteenth century, a socialized Germany of the Hohen- 
zollerns, an idealized and Marxianized state, or something else? Upon our 
conception of the ideal state toward which "progress" should carry us depends 
our "solution" of the problems which we are about to discuss. 



76 CURRENT ECONOMIC PROBLEMS 

A. THE NATURE OF PROGRESS 
35. What Is Progress?^ 

BY jame;s bryce 

When we say that man has advanced, or is advancing, of what 
hnes of advance are we thinking? The Hnes of movement are really 
as numerous as are the aspects of man's nature and the activities 
which he puts forth. Taking his physical structure, is mankind on 
the whole becoming stronger, healthier, less injured by habits which 
depress nervous and muscular forces, and are the better stocks of 
men increasing faster than the inferior stocks? Considered as an 
acquisitive being, has man more of the things that make for comfort, 
more food and clothing, better dwellings, more leisure? Intellec- 
tually regarded, has he a higher intelligence, more knowledge and 
opportunities for acquiring knowledge, more creative capacity, more 
perception of beauty and susceptibility to aesthetic pleasures? Con- 
sidered in his social relations, has he more personal freedom, is he 
less exposed to political oppression, has he fuller security for life 
and property, are there more or less order and concord within each 
community, more or less peace between nations? Lastly, is man 
improving as a moral being? Is there more virtue in the world, 
more sense of justice, more sympathy, more kindliness, more of a 
disposition to regard the feelings and interests of others and to deal 
gently with the weak? In each and all of these departments there 
may be progress, but not necessarily the same rate of progress, and 
we can perfectly well imagine a progress in some points only, accom- 
panied by a stagnation or even a decline in other points. 

When we talk of the progress of the world, do we mean an ad- 
vance in all these respects, or only in some, and if so, in which of 
them? If in all of them, which are the most typical and the most 
significant? Suppose there has been an advance in some, and in 
others stagnation or retrogression, how shall we determine which 
are the most important, the most fraught with promise or discourage- 
ment? An examination of the language of popular writers indicates 
that the current conception has been seldom analyzed. Such writers 
have seemed to have assumed that an improvement in some aspects 
of human life means an improvement in all, perhaps an improvement 
to something like the same extent. Another question suggests itself. 
Is the so-called Law of Progress a constant one? Suppose its action 
in the past to have been proved, can we count upon its continuing 

^Adapted from an article in the Atlantic Monthly, C, 147. Copyright 
(1907). 



PROBLEM OF SOCIAL CONTROL 77 

in the future, or may the causes to which its action has been due 
some time or other come to an end? I pass over other points that 
might be raised. It is enough to have shown in how vague a sense 
the current term has been used. 

36. Evolution or Progress?^ 

BY L. T. HOBHOUSE 

I use the term "evolution" in regard to human society, and also 
the term "progress." This should imply that there is some differ- 
ence between them. By evolution, I mean any sort of growth; by 
social progress, the growth of social life in respect to those qualities 
to which human beings attach or can rationally attach value. Social 
progress, then, is only one among many possibilities of social evolu- 
tion. At least it is not to be assumed that every and any form of 
social evolution is also a form or stage in social progress. For 
example, the caste system is a product of social evolution, and the 
more rigid and narrow the caste, the more complex the hierarchy, 
the more completely has the caste system evolved. But most of us 
would question very strongly whether it could be considered in any 
sense a phase of social progress. So again there is at the present 
day a vigorous evolution of cartels, monopolies, rings and trusts ; 
there is an evolution of imperialism, of militarism, of socialism, of 
a hundred tendencies as to the good or evil of which people differ. 

The fact that a thing is evolving is no proof that it is good ; the 
fact that society has evolved is no proof that it has progressed. The 
point is important because under the influence of biological con- 
ceptions the two- ideas are often confused, and the fact that human 
beings have lived under certain conditions is taken as proof of the 
value of those conditions, or perhaps as proving the futility of ethi- 
cal ideas which rtm counter to evolutionary processes. Thus in a 
recent article I find a contemptuous reference to "the childlike 
desire to make things fair," which is "so clearly contrary to the 
order of the universe which progresses by natural selection." In 
this brief remark you will observe twO' immense assumptions, and 
one stark contradiction. The first assumption is that the universe 
progresses — not humanity, observe, nor the mass of organic beings, 
nor even the earth, but the universe. The second is that it pro- 
gresses by natural selection, a hypothesis which has not yet ade- 
quately explained the bare fact of the variation of organic forms 
on the surface of the earth. The contradiction is that progress is 
incompatible with fairness, the basic element in all judgments of 

^Adapted from Social Evolution and Political Theory, 7-2^. Copyright 
by the Columbia University Press (1911). 



yg CURRENT ECONOMIC PROBLEMS 

value, so that we are called upon to recognize as valuable that by 
which our fundamental notions of value are set at naught. 

By studying certain sides of organic process people arrive at a 
particular hypothesis of the nature of the process. They erect this 
hypothesis into an universal and necessary law, and straightway 
call upon everyone else to acknowledge the law and conform to 
it in action. They do not see that they have passed from one sense 
of law to another, that they have confused a generalization with a 
command, and a statement of facts with a principle of action. They 
accordingly miss the starting point from which a distinct conception 
of progress and its relation to human effort becomes possible. But 
for any useful theory of the bearing of evolution on social effort 
this conception is vital. We can get no light upon the subject un- 
less we begin with the clear perception that the object of social 
effort is the realization of ends to which human beings can ration- 
ally attach value, that is to say, the realization of ethical ends ; and 
this being understood, we may suitably use the term progress 
of any steps leading towards such realization. 

Our conclusion so far is that the nature of social progress can- 
not be determined by barely examining the actual conditions of 
social evolution. Evolution and progress are not the same thing. 
They may be opposed. They might even be so fundamentally op- 
posed that progress would be impossible. 

Because of the influence of biological notions on social and 
economic thought, one phase of the Darwinian theory must be noted. 
The main effect of his work in the world of science was to generate 
the conception of the progress of organic forms by means of a 
continuous struggle for existence wherein those best fitted by 
natural endowment to cope with the surroundings would tend to 
survive. In our field, after Darwin, it began to be held that man, 
in spite of his philosophy, was still an animal, still subject to the 
same laws of reproduction and variation, still modifiable in the 
same manner by the indirect selections of the individuals best 
fitted to their environment. The biological social philosopher had 
not to trouble himself about what was best ; nor, like the social 
investigator, to remain in doubt as to the broadest principles regu- 
lating the life of society. On both these questions his doubts were 
already solved by what he had learned in biology itself. The best 
was that which survived, and the persistent elimination of the unfit 
was the one method generally necessary tO' secure the survival of 
the best. Armed with this generalization he found himself able 
to view the world at large with much complacency. 

To him life was constantly and necessarily growing better. In 
every species the least fit were alwa^'^s being destroyed and the 



PROBLEM OF SOCIAL CONTROL 79 

standard of the survivors propoTtionately raised. No doubt there 
remained in every society many features which at first sight seemed 
objectionable. But here again the evolutionist was in the happy 
position of being able to verify the existence of a soul of goodness 
in things evil. Was there acute industrial competition? It was 
the process by which the fittest came to- the top. Were the losers 
in the struggle left to welter in dire poverty? They would the 
sooner die out. Were housing conditions a disgrace to civilization? 
They were the natural environment of an unfit class, and the means 
whereby such a class prepared the way for its own extinction. Was 
infant mortality excessive? It weeded out the sickly and the weak- 
lings. Was there pestilence or famine? So many more of the 
unfit would perish ? Did tuberculosis claim a heavy toll ? The tuber- 
cular germs are great selectors skilled at probing the weak spots 
of living tissue. Were there wars and rumors of wars? War 
alone would give to the conquering race its due, the inheritence of 
the earth. In a word the only blot that the evolutionist could 
see upon the picture was the ''maudlin sentiment" which seeks to 
hold out a hand to those who are down. The one sinner against 
progress is the man who tries to save the lamb from the wolf. 
Could we abolish this unscientific individual, the prospects of the 
world would be unclouded. 

Yet, before we apply biological conceptions to social affairs, we 
generally suppose that the highest ethics is that which expresses 
the completest mutual sympathy and the most highly evolved 
society that in which the efforts of its members are most completely 
coordinated to common ends, in which discord is most fully sub- 
dued to harmony. Accordingly we are driven to one of two alter- 
natives. Either our valuations are completely false, our notions 
of higher or lower unmeaning, or progress does not depend upon 
the naked struggle for existence. The biologist would cheerfully 
accept the first alternative. As we have already seen, he is dis- 
posed to tell us that we vainly seek to distort truth by importing 
our ethical standards. He is quite ready to insist that we must 
subordinate our judgments of value to the survival test. We must 
judge good that which succeeds. Unfortunately for him at that 
stage his whole theory becomes a barren tautology. Progress now 
in his view results from the survival of the fittest, because proo-ress 
is the process wherein the fittest survive. Again it is always the 
fittest who survive, because the fact of their survival proves their 
fitness. 



8o CURRENT ECONOMIC PROBLEMS 

37. The Criteria of Progress^ 

BY JAMKS BRYCE; 

In our study of the supposed forward movement of mankind, let 
us begin with two comparatively easy lines of inquiry: the physical 
characteristics of the human species, and the conditions under which 
the species has to live ; and let us see what conclusions can be reached 
by examining these. 

Additions to the number of the human race are popularly treated 
as if they were an undoubted benefit. We see every nation and 
every community regarding its own increase as something to be 
proud of. But is the increase of the race any gain to the race? The 
population of Europe is three or four times, and that of North 
America twenty times, as large as it was two centuries ago. This 
proves that there is much more food available for the support of 
life, much more production of all sorts of commodities, and in par- 
ticular an immense increase in the area of land used for producing 
food, with an improvement in the methods of extracting food from 
the land. So the growth of a city like Boston or Chicago proves 
that there has been an immense increase in industry. Men work 
harder, or at any rate more efficiently, and have far better appliances 
for production at their command. 

Whether they live happier lives is another matter. It used to be 
said that he who made two ears of corn grow where only one ear 
had grown before was a benefactor to the race. Is that necessarily 
so? The number of men who can live ofif the soil is larger, but the 
men need not be better off. If there is more food, there are also 
more mouths. Their lives may be just as hard, their enjoyments 
just as limited. Some parts of the earth are already too crowded 
for comfort. The notion that population is per se a benefit and a 
mark of progress seems to be largely a survival from a time when 
each tribe or city needed all the arms it could maintain, to wield 
sword and spear against its enemies. "As arrows in the hands of a 
giant, even so are young children," says the Psalmist; and when 
men are needed to fight against the Hittites, this is a natural reflec- 
tion. It may also be due partly to an unthinking association between 
growth and prosperity. 

Let us pass to quality. The most remarkable fact of the last 
few centuries has been the relatively more rapid growth of those 
whom we call the more advanced races, Teutonic, Celtic, and Sla- 
vonic. Nineteen centuries ago there were probably less than ten 

^Adapted from an article in the Atlantic Monthly, C, 147-156. Copy- 
right (1907). 



PROBLEM OF SOCIAL CONTROL 8i 

million people belonging to these three races. There are today 
probably over three hundred and fifty million, while the so-called 
backward races have increased more slowly, and are now everywhere 
under the control of the more advanced races. In duration of life, 
too, there is unquestionably an improvement. Lunacy, however, is 
increasing. This seems to imply that there are factors in modern 
life which tend to breed disorders in the brain. In this connection 
a still more serious question arises. 

The law of differentiation and improvement by means of natural 
selection and the survival of the fittest may reasonably be thought 
to have done its work during the earlier period of the history of 
mankind. The races which have survived and come to dominate the 
earth have been the stronger races ; and, while strife lasted, there 
has always been a tendency for physical strength and intelligence to 
go on increasing. The upper classes in every community were 
always stronger and handsomer than the classes at the bottom of the 
scale. The birth-rate was probably higher among the aristocrats, 
and the chance of the survival of infants better. But in modern 
society the case is quite otherwise. The richer and more educated 
classes marry later and as a rule have smaller families than the 
poorer class, whose physique is generally weaker and whose intelli- 
gence is generally on a somewhat lower level. The result is that a 
class in which physical strength and a cultivated intelligence are 
hereditary increases more slowly than do classes inferior in these 
qualities. Fortunately, the lines of class distinction are much less 
sharply drawn than they were some centuries ago. The upper class 
is always being recruited by persons of energy and intellect from 
the poorer classes. Still we have here a new cause which may tend 
to depress the average level of human capacity. 

The improvement, so far as attained, in the physical quality of 
mankind is largely due to such changes in its environment as the 
greater abundance of food and clothing, the better conditions of 
housing, the diffusion of property among all classes in the com- 
munity. Along these lines the improvement has been extraordinary. 
The luxury of the rich, the comfort of the middle class, the com- 
parative immunity of the poorer classes from famine and pestilence, 
have increased within the last two centuries more than they had 
during many preceding centuries. 

Most remarkable of all has been the cause of these improve- 
ments, namely, the increase in our knowledge of natural laws and 
the power over natural forces which has been thereby acquired. 
Man has now, by comprehending Nature, become her master. These 
are the things which are commonly in our mind when we talk of 



82 CURRENT ECONOMIC PROBLEMS 

Progress. It is the wonderful gains made in these things which are 
visible and tangible and which affect our daily life at every turn that 
have struck the popular mind, and have seemed to mark, not only 
a long onward step, but the certainty of further advance. Material 
progress has seemed to sweep everything else along with it. 

Whether this be so is the very question we have to consider. 
Does our increased knowledge and command of nature, do all those 
benefits and comforts which that mastery has secured, so greatly 
facilitate intellectual and moral progress that we may safely assume 
that there will be an increase in intelligence, in virtue, and in all 
that is covered by the word Happiness? It seems hard not to 
believe it. 

Certainly we see under these new conditions less anxiety, less 
occupation with the hard necessities of finding food and clothing. 
Work itself is less laborious, because more largely done by machin- 
ery. There is more leisure that can be used for the acquisition of 
knowledge and for setting thought free to play upon subjects other 
than practical. The opportunities for obtaining knowledge have been 
extended and cheapened. Transportation has become cheap, easy, 
and swift, enriching and refreshing the mind by foreign travel. 
Works of art are produced more abundantly. The mere increase of 
population and purchasing power has a favoring influence upon 
intellect, because there is more demand for the products of intellect 
and more persons employed in their production. Thus it is clear 
• that material progress provided at least unprecedented facilities and 
opportunities for intellectual progress. And the quantity of intel- 
lectual activity has enormously increased. 

Quality, however, must also be considered. Plato hinted that the 
invention of writing had weakened the powers of the human mind. 
We may well doubt whether the intellectual excellence of the age 
can be measured by the number of speeches or the amount of printed 
matter it produces, and whether the incessant reading of newspapers 
and magazines tends on the whole to strengthen the habit of thinking. 

Material progress has affected the forms which intellectual activ- 
ity takes and the lines of inquiry which it follows. But there is no 
evidence that it has done more to strengthen than to depress the 
intensity and originality and creative energy of intellect itself ; nor 
have these qualities shown themselves more abundant as the popula- 
tion of the earth has increased. And, as for accomplishment intel- 
lectually, may there not be a limit to this kind of advance, and may 
we not be approaching that limit ? 

But, if it has proved difficult to say how far material progress 
and the diffusion and extension of knowledge have stimulated and 



PROBLEM OF SOCIAL CONTROL 83 

are likely to stimulate intellectual progress, still harder is it to esti- 
mate their influence on the standard of moral excellence. What is 
Moral Progress? The ancient philosophers would have described 
its aim as being Harmony with Nature, that is, with those tendencies 
in man which lead him to his highest good by raising him above 
sense temptations. Augustine or Thomas Aquinas would have 
placed it in conformity to God's will to which all thoughts and pas- 
sions should be attuned. Neither of these ideals had any relation 
to material progress, and saints would probably have thought such 
progress hurtful rather than helpful to the soul. 

To estimate the degree in which some sins or vices have declined 
and others have developed, the extent to which some virtues have 
grown more common and others more rare; to calculate the re- 
spective ethical values of the qualities in which there has been an 
improvement and a decline; and to strike a general balance after 
appraising the worth of all these assets — this is a task on which few 
would care to enter. No analysis and no synthesis could make much 
of data so uncertain in quantity and so disputable in quality. Differ- 
ent virtues rise and fall, bloom and wither, as they inspire joy or 
command admiration. 

It may, however, be suggested that there is one thing whose 
relation to material progress must somehow be the ultimate test of 
every kind of advance. It is Happiness. But what is Happiness? 
Is it Pleasure? Are pleasures to be measured by a qualitative as 
well as a quantitative analysis? Shall we measure them by the in- 
tensity by which they are felt or by the fineness and elevation of 
the feeling to which they appeal? Is the satisfaction which Pericles 
felt in watching the performance of a drama of Sophocles greater 
or less than the satisfaction which one of his slaves felt in draining 
a jar of wine? 

The comparison of our own age with preceding ages does not 
solve the problem. Most of us probably rejoice that we did not live 
in the fifth or even the seventeenth century. But can we be sure 
that the individual man in these centuries had a worse time than the 
average man now has ? He was in many points less sensitive to 
suffering than we are, and he may have enjoyed some things more 
intensely. True, the fear of torment brooded like a black cloud over 
the minds of past generations. Yet we know that many persons look 
back to the Ages of Faith as ages when man's mind was far more 
full of peace and hope than at present. 

Happiness is largely a matter of temperament, and temperament 
largely depends upon physiological conditions, and the physiological 



84 CURRENT ECONOMIC PROBLEMS 

conditions of life are much affected by economic and social condi- 
tions. How can we then determine whether the excitement and 
variety of modern life make for happiness? 

We may seem to be better equipped for prophesy than we were, 
because we have come to know all the surface of the earth, and its 
resources, and the races that dwell thereon, and their respective gifts 
and capacities. But how these elements will combine and work to- 
gether is a problem apparently as inscrutable as ever. The bark that 
carries Man and his fortunes traverses an ocean where the winds 
are variable and the currents unknown. 

B. THE CONTROL OF ECONOMIC ACTIVITY 
38. The Agencies of Social Control 

BY EUZABE;TH hughes 

The prominence attached to government interference with indus- 
trial enterprise has caused the other ways in which society orders, 
directs, and defines the efforts of individuals to be overlooked. 
Social control, it must be remembered, has many channels through 
which to spread and need confine itself at no time to the single 
course of overt legislation. 

Group will operates most persistently and potently through the 
great unwritten rules and restrictions imposed by custom, which 
through their very familiarity often escape observation. A glance 
at Eastern, then at Western, civilization may serve to show by con- 
trast how far-reaching and permeating is custom's influence upon 
industrial life. In Eastern countries custom decrees that trades 
shall be hereditary; that the tools and methods used by ancestors 
shall continue to be used by present-day workers; and that human 
labor shall not be supplanted in any marked degree by machine 
effort, but only supplemented somewhat by it. Western civilization, 
on the contrary, adopts as its fetish the new rather than the old, 
favors development rather than stagnation — in a word, tends to 
make change itself customary and normal. In production machinery 
is extensively used, and a child may follow quite another trade than 
his father's, or, if he adopts his parent's calling, need not execute it 
in precisely the same manner. But though Western society is not 
stereotyped to the degree to which the social groups of the Orient 
are, it nevertheless shows more than traces of conservatism. Mill- 
owners, for example, through custom cling to child labor ; merchants 
determine selling prices by adding customary percentages of profit, 
differing greatly in different trades ; the standardization of woman's 



PROBLEM OF SOCIAL CONTROL 85 

dress makes little headway against the custom of frequent and radical 
changes in style; spring millinery is marketed in January in spite of 
untoward weather; extra clerks are hired at Christmas to meet the 
demands of those whom no society for the suppression of useless 
giving can deter from eleventh-hour activity in buying. It is custom 
which leads people to continue patronizing the dealer and the brand 
of goods they have formerly found satisfactory — or unsatisfactory — 
instead of accepting the "just-as-good" substitutes. Without the 
power of custom "good will" could not be capitalized as an asset, 
and trademarks would not be desirable. Custom, then, does actively 
and potently aid in regulating industry. 

The various institutions of society epitomize forms of social con- 
trol. Schools with their industrial departments in a measure sup- 
plant the older system of apprenticeship and by their vocational 
guidance bureaus attempt to place children in fitting occupations. 
The press, the pulpit, and the platform are agents for the dissemina- 
tion of ideas ; and, by the impression of group ideas and standards 
upon individuals, foster the establishment of social solidarity. 
Through these a society's codes of ethics find expression : exploita- 
tion of workmen, for example, is frowned upon ; an opportunity for 
everyone is coming to be regarded as a matter of right; and it is 
insisted that competition shall be free and not "cut-throat." 

In addition to the general ethical codes of society are the particu- 
lar codes of the different professions. For instance the code of the 
medical profession exercises a restraining and compelling influence 
over many activities of its members. It is responsible alike for the 
custom of non-advertisement of medical services, a large amount of 
charity work, and a system of class prices that frequently becomes 
"charging what the traffic will bear." The medical man's code rules 
out many of the things which law permits, and stands in sharp con- 
trast to the principles of the business man who still holds to the 
"eye-for-an-eye" doctrine and looks upon shrewdness and sagacity 
as cardinal virtues, honesty as a matter of policy, and good will as 
desirable private capital. He is, however, unlike the medical man, 
constrained to charge rich and poor a single price for his wares, thus 
more adequately protecting "the consumer's surplus" of the well-to- 
do classes than it is protected from the medical fraternity. On the 
contrary there is no gratuitous gift to the ne'er-do-well. 

Lawyers, ministers, and teachers — each in turn have their codes. 
The tyranny of social custom shows itself especially in the standard 
of living which each of the professional classes is expected to main- 
tain. Salaries and fees must be high enough in the aggregate to 
make a given standard attainable with circumspect expenditure. 



86 CURRENT ECONOMIC PROBLEMS 

A man in choosing his profession adopts along with his choice 
an obhgation to obey the ethical code society and the particular 
group he has joined expects him to follow. If medicine, he must 
live up to the ethics of the medical profession; if law, he must obey 
its behests under penalty of debarment ; if certain particular lines of 
business, he must rise or stoop to the plane of competition maintained 
in these lines, since nonconformity automatically excludes through 
business disaster those who do not conform. 

He may subject himself still further to voluntary compulsion by 
joining a club or an association; for clubs and associations, of what- 
ever sort they be, have in common the exercise of general control 
over members. The trade unionist, for example, may not "scab" 
even if he is unemployed because of a strike he did not vote for; 
nor may he speed up even though he can easily increase his earnings 
through piece-work ; nor work overtime without extra pay ; nor buy 
anything without a union label; nor print anything except on a 
union press. Just so the employer who has allied himself with an 
employers' association must uphold in relation to his laborers those 
principles and stipulations upon which the association has agreed. He 
must conduct his business less in accord with his individual will and 
more as the group has deemed best. Again there is the Consumers' 
League, whose members pledge themselves to patronize only those 
manufacturers who measure up to a standard set by the League and 
attain thereby unto an honored place on its white list and win the 
right to use the Consumers' label. 

Enough has been said to show that government regulation is only 
one form of social control. In fact, it would seem as if, in a demo- 
cratic society, legislation is only resorted to when there is conflict in 
control exerted by different groups within society at large. The 
more satisfactory the control by the smaller group, the less the eco- 
nomic or social oppression of one by another, the less the interference 
of society at large through law and governmental control. 

39. The Family as an Agency of Control 

The importance of social control lies in its performance of two 
functions. The first is the organization of industrial society; the 
second, the direction of social activities to ends that constitute prog- 
ress. These results require for their accomplishment the use of 
a variety of institutions. So prevalent has become the habit of ex- 
pressing this problem in terms of the Individual and the State, that 
we are prone to overlook the less obvious, but extremely important, 
agencies of control. The influences of some of these, both in holding 
society together and in directing its development, are far more ex- 



PROBLEM OF SOCIAL CONTROL 87 

tensive and their sanctions far more compelling than even state 
authority. In fact such is their power that one of the principal 
functions of the state has come to be forcing upon a small minority 
modes of action which have been developed through other agencies 
and which have already come to exercise a compelling influence 
over the majority. A single example, that of the Family, will serve 
to show the nature and efficiency of these usually neglected agencies. 

The industrial system is in general manned by adults ; so we are 
too prone to overlook the industrial importance of children. The 
latter constitute an incipient industrial force; to them the manage- 
ment and operation of the industrial system will in course of time be 
intrusted. How this task is performed depends to a large extent 
upon influences brought to bear upon them while they are still 
unincumbered with active industrial duties. The system demands 
personal efficiency; it must have workers who are capable of sus- 
tained effort. This is an acquired characteristic. The savage does 
not possess it; improper home influences may prevent the civilized 
child from acquiring it. Its acquisition is very closely associated 
with the habits of home discipline. The common ethical standards 
to be applied to business dealings are also quite dependent upon the 
same influences. The home develops individual norms ; these grow 
into class and social norms, which exercise over the individual vital 
control of actions through all-compelling imperatives and inhibitions. 

Industrial efficiency likewise depends upon the proper distribu- 
tion of workers among the different occupations. The decisions af- 
fecting this distribution are not always made by the heads of fami- 
lies, but all of them are surrounded by many and varied family 
influences. The preparation for entering the chosen occupations is 
usually made under the same influences. Since the organization of 
society as well as its development is contingent upon a proper distri- 
bution into occupational groups, the importance of this cannot very 
well be underestimated. The freedom which an individual pos- 
sesses to choose and change his own occupation usually does not 
come to him until a time when an exercise of this freedom would be 
attended by losses too great to permit it. 

Both the immediate welfare and the progress of society vitally 
depend upon the proportions between the three factors of produc- 
tion — land, labor, and capital.' The family, more than any other 
institution, controls the increase in the two factors subject to in- 
crease, capital and labor. The origin of capital, as we know, is in 
savings. Savings are what is left of the family income when the 
family expenses have been met. Since the expenditure depends very 
largely upon family habits, the dependence of capital upon this insti- 
tution is clearly seen. Family influences, too, are quite potent in 



88 CURRENT ECONOMIC PROBLEMS 

inculcating habits of thrift or prodigality, thus affecting capital 
accumulation in the next generation. 

The supply of labor is controlled through a control of the number 
of people. A new state, possessed of undeveloped resources, can 
partially control its numbers, through regulation of immigration. 
But such a state has least need for controlling its numbers. As the 
country develops, as resources are utilized, and as immigration falls 
off, a control of numbers becomes more and more a control of the 
birth-rate. No state has thus far succeeded directly in controlling 
the number of births. Even indirectly its influence has not been very 
potent. This matter has been in the past, and will be in the future 
very largely, left to the family. Yet upon this question of numbers 
rest very vital economic considerations, including the questions of 
wages, standards of living, capacity for material development, etc. 
In brief, the forces influencing the sizes of the productive funds 
out of which wealth is to be increased are very largely familial. 

It is often said that wants are the mainspring of economic activ- 
ity; that it is the possession of wants which is responsible for our 
industrial system. If this is so, we must remember that the wants 
which lead to industrial endeavor, particularly to the fullest utiliza- 
tion of personal productive capacities, are familial, rather than per- 
sonal, wants. The beginning and end of the economic process lie 
in the family. It is, both directly and indirectly, one of the most 
potent factors in organizing society and in determining the direction 
of its development. 



40. The State as an Institution of Social Control 

BY EDWIN CANNAN 

The existence of the state and the order enforced by it makes it 
possible for property to play a part in organization. We might 
conceive a state of things where co-operation carried on under the 
influence of property might exist without any organized authority of 
government. But such a state of things has never been realized, nor 
is likely to be. So the state has been necessary in the past and is 
likely to continue to be so in the immediate future. Further, even 
in a society of perfectly just men it would be desirable to have some 
common authority to make changes when necessary. Otherwise 
progress would be exceedingly slow, since it would have to be im- 
perceptible. If fast enough to be perceptible, it would seem to violate 

^Adapted from Wealth: A Brief Explanation of the Causes of Economic 
Welfare, 89-95 (1914). 



PROBLEM OF SOCIAL CONTROL 89 

custom and would, therefore, be tabooed, in the absence of ma- 
chinery for discussing reasons and passing judgment on them. 

In the eighteenth century there grew up a school of thinkers 
who said to the governments of the time, "Laissez faire" or "Let 
alone." The more philosophical among them were influenced by the 
cult of Nature prevalent at the time, thinking that certain institu- 
tions were natural and therefore good, while others were artificial 
and bad. They wanted the institutions which they thought natural 
let alone and the others abolished. The practical men wanted cer- 
tain institutions abolished which they regarded as harmful, and did 
not trouble themselves to think of the others. The natural institu- 
tions of the philosophers are now seen to be nothing but slight modi- 
fications of the institutions of their own time. To the practical man, 
the precept "Laissez faire" never meant "Leave everything alone," 
nor even "Leave all natural things alone," but simply, "Leave alone 
certain things which I think ought to be left alone." The practical 
men got their way to a considerable extent, and therefore it has 
become the fashion to speak of the "laissez-faire period." But there 
never was and never can be a state which practices this policy. The 
very establishment of the State negatives a policy of complete "Let 
alone." 

In primitive times the demand upon the authority which repre- 
sents the State is constantly for the enforcement of "good old cus- 
toms." When the State complies, it is not letting alone, but taking 
an active part in the enforcement of these customs, which might 
otherwise fall into disuse owing to violation by interested parties. 
Moreover, the enforcement of these customs, coupled with neglect to 
enforce other customs, involves a discrimination favorable to prog- 
ress. Consequently there was a large amount of "State interference" 
even in periods when the State seemed to do nothing except to 
reinforce the people's respect for custom. 

The general enforcement of law and order and the facilitation of 
necessary and desirable changes in that law and order, though per- 
haps the most vital, is by no means the only important function of the 
State in economic organization. Separate property in land has never 
covered the face of any considerable country. A network of narrow 
strips forming the means of communication is always found outside 
the limits of private property. Without this reservation from pri- 
vate property any considerable amount of communication would be 
impossible. Hence provision of the means of communication has 
always been in the hands of the State. Where private parties build 
railways they are granted by the State the right of eminent domain. 



90 CURRENT ECONOMIC PROBLEMS 

or the power. to buy the land they need to get the required consecu- 
tive strip, even if the owners do not wish to sell. They have to pay 
only fair "compensation." 

In modern times a number of other things have grown up which 
resemble the means of communication in being spread over large 
areas in thin lines. Water, drainage, gas and electric lighting, tele- 
graphic and telephonic communications, require a laying of a net- 
work of wires all over the face of the world. It is constantly neces- 
sary to acquire private property for a part of this work. These 
things are very similar to roads, railways, and canals in many of 
their characteristics, and are therefore dealt with in much the same 
way. In helping to provide these engineering works required for 
the progress of invention and the thicker population in modern 
times, the State may be said to be arranging for a necessary supple- 
ment to the organization based on separate property. 

Some kind of organization covering the whole industrial terri- 
tory and armed with certain disciplinary powers is obviously neces- 
sary, and is supplied by the State; badly as it works in its earlier 
forms, it is never worse than the chaos which preceded it, and as 
time goes on it is gradually improved. 

C. THE STATEMENT OF THE LAISSEZ-FAIRE 
THEORY 

41. The Fundamental Law of Nature^ 

BY WII.UAM BLACKSTONE; 

As, therefore, the Creator is a being, not only of infinite power 
and wisdom, but also of infinite goodness, he has been pleased so to 
contrive the constitution and frame of humanity, that we should 
want no other prompter to enquire after and pursue the rule of 
right, but only our self love, that universal principle of action. For 
he has so intimately connected, so inseparably interwoven the laws 
of external justice with the happiness of each individual that the 
latter cannot be attained but by observing the former, and if the 
former be punctually obeyed, it cannot but induce the latter. In 
consequence of which mutual connection of justice and human 
felicity, he has not preplexed the law of nature with a multitude 
of abstracted rules and precepts, referring merely to the fitness or 
unfitness of things, as some have vainly surmised, but has graciously 
reduced the rule of obedience to this one paternal precept, "that 
man should pursue his own true and substantial happiness." This 

^Commentaries on the Laws of England, Book i, sec. 2 (1765). 



PROBLEM OF SOCIAL CONTROL 91 

is the foundation of what we call ethics or natural law ; for the 
several articles into which it is branched in our system amount 
to no more than demonstrating- that this or that action tends to 
man's real happiness, and therefore very justly concluding that the 
performance of it is a part oi the law of nature ; or, on the other 
hand, that this or that action is destructive to man's real happiness, 
and therefore that the law of nature forbids it. 

42. A Diatribe against Human Institutions^ 

BY J. J. ROUSSEAU 

All things are good as their Author made them, but everything 
degenerates in the hands of man. By man our native soil is forced 
to nourish plants brought from foreign regions, and one tree is 
made to bear the fruit of another. Man brings about a general 
confusion of elements, climates, and seasons ; he mutilates his dogs, 
his horses, and his slaves ; he seems to delight only in monsters and 
deformity. He is not content with anything as Nature left it. 

As things now are, a man left to himself from his birth would, 
in his association with others, prove the most preposterous creature 
possible. The prejudices, authority, necessity, example, and, in 
short, the vicious social institutions in which we find ourselves sub- 
merged, would stifle everything natural in him, and yet give him 
nothing in return. He would be like a shrub which has sprung up 
by accident in the middle of the highway, to perish by being thrust 
this way and that and trampled upon by passers-by. All our wisdom 
consists in servile prejudices; all our customs are but suggestions, 
anxiety and constraint. Civilized man is born, lives, dies in a state 
of slavery. At his birth he is sewed in swaddling clothes ; at his 
death he is nailed in a coffin ; as long as he preserves the human form 
he is fettered by our institutions. 

43. A Plea against Governmental Restraints'^ 

BY ADAM SMITH 

Every individual is continually exerting himself to find out the 
most advantageous employment for whatever capital he can com- 
mand. It is his own advantage, indeed, and not that of the society, 
which he has in view. But the study of his own advantage, natur- 
ally, or rather necessarily, leads him to prefer that employment which 
is most advantageous to the society. 

^£mile ou l'£ducation, liv. i (1762). 

''The Wealth of Nations, Book iv, chap, ii (1776). 



92 CURRENT ECONOMIC PROBLEMS 

First, every individual endeavors to employ his capital as near 
home as he can, and consequently as much as he can in the support 
of domestic industry, provided always that he can thereby obtain the 
ordinary, or not a great deal less than the ordinary, profits of stock. 
Secondly, every individual who employs his capital in the support 
of domestic industry necessarily endeavors so to direct that industry, 
that its produce may be of the greatest possible value. 

The produce of industry is what it adds to the subject or 
materials upon which it is employed. In proportion as the value of 
this produce is great or small, so will likewise be the profits of the 
employer. But it is only for the sake of profit that any man em- 
ploys a capital in the support of industry ; and he will always, there- 
fore, endeavor to employ it in the support of that industry of which 
the produce is likely to be of the greatest value, or to exchange for 
the greatest quantity either of money or of other goods. 

But the annual revenue of every society is always precisely equal 
to the exchangeable value of the whole annual produce of its in- 
dustry, or, rather, is precisely the same thing with that exchange- 
able value. As every individual, therefore, endeavors as much as 
he can both to employ his capital in the support of domestic in- 
dustry, and so to direct that industry that its produce may be of 
the greatest value, every individual necessarily labors to render the 
annual revenue oi the society as great as he can. He generally, 
indeed, neither intends to promote the public interest, nor knows 
how much he is promoting it. By preferring the support of do- 
mestic to that of foreign industry, he intends only his own security ; 
and by directing that industry in such a manner as its produce may 
be of the greatest value, he intends only his own gain, and he is 
in this, as in many other cases, led by an invisible hand to promote 
an end which was no part of his intention. Nor is it always the 
worse for the society that it was no part of it. By pursuing his own 
interest he frequently promotes that of the society more effectually 
than when he really intends to promote it. I have never known 
much good done by those who affected to trade for the public good. 
It is an affectation, indeed, not very common among merchants, 
and very few words need be employed in dissuading them from it. 

What is the species of domestic industry which his capital can 
employ, and of which the produce is likely to be of the greatest 
value, every individual, it is evident, can, in his local situation, judge 
much better than any statesman or lawgiver can do for him. The 
statesman who should attempt to direct private people in what 
manner they ought to employ their capitals would not only load 
himself with a most unnecessary attention, but assume an authority 



PROBLEM OF SOCIAL CONTROL 93 

which could safely be trusted, not only to no single person, but to 
no council or senate whatever, and which would nowhere be so 
dangerous as in the hands of a man who had folly and presumption 
enough to fancy himself fit to exercise it. 

44. A General Condemnation of Government^ 

BY WIIvIvIAM GODWIN 

Society is an ideal existence, and not on its own account entitled 
to the smallest regard. The wealth, prosperity, and glory of the 
whole are unintelligible chimeras. Set no^ value on anything, but 
in proportion as you are convinced of its tendency to make indi- 
vidual men happy and virtuous. Benefit, by every practical mode, 
man wherever he exists ; but be not deceived by the specious idea 
of affording services to a body of men, for w'hich no individual man 
is the better. Individuals cannot have too frequent or unlimited 
intercourse with each other; but societies of men have no interests 
to explain and adjust, except so far as error and violence may 
render explanation necessary. This consideration annihilates at 
once the principal objects of that mysterious and crooked policy 
which has hitherto occupied the attention of governments. 

Government can have but two legitimate purposes, the suppres- 
sion of injustice against individuals within the community, and the 
common defence against external invasion. 

Legislation, that is, the authoritative enunciation of abstract 
or general propositions,ns a function of equivocal nature, and will 
never be exercised in a pure state of society, or a state approaching 
to purity, but with great caution and unwillingness. It is the most 
absolute of the functions of government, and government is itself 
a remedy that invariably brings its own evils along with it. Legis- 
lation, as it has been usually understood, is not an affair of human 
competence. Reason is the only legislator, and her decrees are irre- 
vocable and uniform. The functions of society extend, not to the 
making, but the interpreting of law ; it cannot decree, it can only 
declare that which the nature of things has already decreed, and the 
propriety of which irresistibly flows from: the circumstances of the 
case. 

The true reason why the mass of mankind has so often been 
made the dupe of knaves has been the mysterious and complicated 
nature of the social system. Once annihilate the quackery of 
government, and the most homebred understanding will be prepared 

^Adapted from An Enquiry concerning Political Justice and Its Influence 
on General Virtue and Happiness, 514, 561, 564, 555, 168, 575, 579 (1793). 



94 



CURRENT ECONOMIC PROBLEMS 



to scorn the shallow artifices of the state juggler that would mis- 
lead him. With what delight must every well informed friend of 
mankind look forward to the auspicious period, the dissolution of 
political government, of that brute engine, which has been the only- 
perennial cause of the vices of mankind, and which has mischiefs 
of various forms incorporated with substance, and not otherwise 
to be removed than by its utter annihilation. 

45. The Identity of Individual and Social Good'' 

BY pie;rcy ravdnstone: 

Nature has implanted in every man's breast an instinct which 
teaches him intuitively to pursue his own happiness ; and, by con- 
necting the welfare of every part of society with that of the whole, 
she has wisely ordained that he shall not be able to realize his 
own wishes without contributing to the happiness of others. 

Every man may thus safely be intrusted with the care of work- 
ing out his own prosperity. It is not necessary for governments, 
it is therefore no part of their duty, to teach to individuals what 
will most conduce to the success of their pursuits; they are ill-cal- 
culated for such a superintendence. All care of this sort is on their 
part wholly impertinent. Their functions are of quite a different 
nature ; to correct the vicious attachment to their own interests which 
too frequently induces men to seek their own apparent good by the 
injury of others, which would disorder the whole scheme of society, 
to bring about what the}^ mistakenly consider their own happiness. 
To restrain, not to direct, is the true function of the government; 
it is the only one it is called on to perform, it is the only one it can 
safely execute. It never goes out of its province without doing 
mischief. The mischief is not always apparent, for the constitution 
of the patient is often sufficiently strong to resist the deleterious 
effects of the quackery. But it is not safe to try experiments which 
can do no good, merely because the strength of the patient may pre- 
vent them from being injurious. 

The spirit of interference has never manifested itself so strongly 
as of late years. It constitutes the very essence of modern political 
economy. Everything is to be done by the state; nothing is to be 
left to the discretion of individuals. It is proposed to transfer men 
into a species of political nursery-ground, where the quality of 
plants is to be regulated with mathematical exactness, to be fitted 
to the capacity of the soil ; where every exuberance in their shoots 

*From A Few Doubts as to the Correctness of Some Opinions Generally 
Entertained on the Subjects of Population and Political Economy, 2-3 (1821). 



PROBLEM OF SOCIAL CONTROL 95 

is to be immediately pruned away, and their branches confined within 
the boimds of the supporting espalier. 

46. A Protest against Useless Restrictions^" 

BY JEIrEMY BENTHAM 

Ashurst. — The law of this country only lays such restraints on 
the actions of individuals as are necessary for the safety and good 
order of the community at large. 

Truth. — I sow corn : partridges eat it, and if I attempt to defend 
it against the partridges, I am fined or sent to gaol : all this, for fear 
a great man, who is above sowing corn, should be in want of par- 
tridges. 

The trade I was born to is overstocked ; hands are wanting in 
another. If I offer to work at that other, I may be sent to gaol for 
it. Why? Because I have not been working at it as an apprentice 
for seven years. What's the consequence? That, as there is no 
work for men in my original trade, I must either come upon the 
parish or starve. 

There is no employment for me in my own parish : there is 
abundance in the next. Yet if I offer to go there, I am driven away. 
Why? Because I might become unable to work one of these days, 
and so I must not work while I am able. I am thrown upon one 
parish now, for fear I should fall upon another, forty or fifty years 
hence. At this rate how is work ever to be got done? If a man is 
not poor, he won't work : and if he is poor, the law won't let him. 
How then is it that so much is done as is done? As pockets are 
picked — by stealth, and because the law is so wicked that it is only 
here and there that a man can be found wicked enough to think of 
executing it. 

Pray, Mr. Justice, how is the community you speak of the better 
for any of these restraints? and where is the necessity of them? and 
how is safety strengthened or good order benefitted by them ? 

But these are only three out of this thousand. 

47. Opportunity 

BY JOHN J. INGAI,I,S i 

Master of human destinies am I ! 
Fame, love, and fortune on my footsteps wait; 
Cities and fields I walk : I penetrate 
Deserts and seas remote, and passing by 

^"From Truth against Ashurst, in Works of Jeremy Bentham, V, 234 
(1823). 



96 CURRENT ECONOMIC PROBLEMS 

Hovel and mart and palace, soon or late 

I knock unbidden once at every gate ! 

If sleeping wake: if feasting rise before 

I turn away. It is the hour of fate 

And those who follow me reach every state 

Mortals desire, and conquer every foe 

Save death ; but those who doubt or hesitate 

Condemned to failure, penury, and woe 

Seek me in vain and uselessly implore. 

I answer not, and I return no more ! 

D. THE INTERPRETATION OF LAISSEZ-FAIRE 
48. The Philosophy of Individualism^^ 

BY AIvBERT V. DICEY 

Individualism as regards legislation is popularly connected with 
the name and the principles of Bentham. The ideas which under- 
lie the Benthamite or individualistic scheme of reform may con- 
veniently be summarized under three leading principles and two 
corollaries. 

I. English law, as it existed at the end of the eighteenth cen- 
tury, had developed almost hap-hazard, as the result of customs 
or modes of thought which had prevailed at different periods. The 
laws had for the most part never been enacted. In order to amend 
the fabric of the law we must, so Bentham insisted, lay down a plan 
grounded on fixed principles. Legislation, in short, he proclaimed, 
is a science based on the characteristics of human nature, and the 
art of law-making, if it is tO' be successful, must be the application 
of legislative principles. 

II. The right aim of legislation is the carrying out of the 
principle of utility, or, in other words, the proper end of every law 
is the promotion of the greatest happiness of the greatest number. 

This principle is the formula with which popular memory has 
most closely connected the name of Bentham. Whatever objections 
this principle may be open to, one may with confidence assert that 
it is far more applicable to law than to morals, for at least two 
reasons : First, legislation deals with numbers and with whole classes 
of men ; morality deals with individuals. It is obviously easier to 
determine what are the things which as a general rule promote the 

"Adapted from Lectures on the Relation between Law and Public Opinion 
in England during the Nineteenth Century, 125-149. Copyright by Mac- 
millan & Co. (1905). 



PROBLEM OF SOCIAL CONTROL 97 

happiness of a large number of persons, than to form even a con- 
jecture as to what may constitute the happiness of an individual. 
Let it be noted that the lav^ aims not at positive happiness, but only 
at the creation of conditions under which it is likely that its subjects 
will prosper. Secondly, law is concerned primarily with external 
actions, and is only very indirectly concerned with motives. Mor- 
ality, on the other hand, is primarily concerned with motives and 
feelings. But it is far easier to maintain that the principle of utility 
is the proper standard of right action than that it supplies the founda- 
tion on which rests the conviction of right or wrong. 

Ideas of happiness, it has been objected, vary in different ages, 
countries, and among different classes; a legislator, therefore, gains 
no real guidance from the dogma that laws should aim at pro- 
moting the greatest happiness of the greatest number. To this 
objection there exists at least two answers. The first is that, even 
if the variability of men's conceptions of happiness be admitted, 
the concession proves no more than that the application of the 
principle of utility is conditioned by the ideas of human welfare 
which prevail at a given time in a given country. There is no reason 
why utilitarianism should refuse to accept this conclusion. Different 
laws may promote the happiness of different people. The second 
reply is that, as regards the conditions of public prosperity, the 
citizens of civilized states have, in modern times, reached a large 
amount of agreement. For instance, who' can seriously doubt that 
a plentiful supply of cheap food, efficient legal protection against 
violence and fraud, and the freedom of all classes from excessive 
labor conduce to the public welfare? What man out of Bedlam 
ever dreamed of a country the happier for pestilence, famine and 
war? Laws deal with very ordinary matters, and deal with them in 
a rough and ready manner. The character, therefore, of a law, 
may well be tested by the rough criterion embodied in the doctrine 
of utility. 

There still exists, however, an objection that must be examined 
with care. Bentham and his disciples have displayed a tendency to 
underestimate the diversity between human beings. They have too 
easily accepted the notion of uniformity in ideas of happiness in 
different countries and different ages. This supposition has facil- 
itated legislation, but it has led to the feeling that laws which in 
the ninteenth century promoted the happiness of Englishmen, must 
at all times promote the happiness of the inhabitants of all countries. 

The foundation then of legislative utilitarianism is the combi- 
nation of two convictions. The one is the belief that the end of 
human existence is the attainment of happiness ; the other is the 



98 CURRENT ECONOMIC PROBLEMS 

assurance that legislation is a science and that the aim of laws is 
the promotion of human happiness. 

III. Every person is in the main and as a general rule the 
best judge of his own happiness. Hence legislation should aim at 
the removal of all those restrictions on the free action of an indi- 
vidual which are not necessary for securing the like freedom on 
the part of his neighbors. 

This dogma of laissez faire is not from a logical point of view 
an essential article of the utilitarian creed. A benevolent despot 
might enforce upon his people laws which, though they might 
diminish individual liberty, were likely, nevertheless, to ensure the 
well-being of his people. Yet laissez-faire was practically the most 
vital part of Bentham's doctrine. Bentham perceived that under a 
system of ancient customs modified by hap-hazard legislation, un- 
numbered restraints were placed on the actions of individuals, 
which were in no sense necessary for the safety and good order of 
the community at large, and he inferred at once that these re- 
straints were evils. Consequently we have from him the eulogy 
of laissez-faire. But with him and his disciples it was a totally dif- 
ferent thing froim' easy acquiescence in the existing conditions of 
life. It was a war-cry. It sounded the attack upon every restric- 
tion, not justifiable by some definite and assignable reason of utility. 

From these three guiding principles O'f legislative utilitarianism — 
the scientific character oi sound legislation, the principle O'f utility, 
faith in laissez-faire — English individualists have in practice deduced 
the two corollaries : that the law ought to extend to- the sphere and 
enforce the obligation of contracts; and that, as regards the pos- 
session of political power, every man ought tO' count for one and no 
man count for more than one. Each of these ideas has been con- 
stantly entertained by mien who' have never reduced it to a formula 
or carried it out to its full logical result ; each of these two ideas has 
profoundly influenced modern legislation. 

49. The Individualistic Theory of Governments^ 

BY JOHN STUART MII.Iv 

We have now reached the question to what objects governmental 
intervention in the affairs of society may or should extend. The 
supporters of interference have been content with asserting a gen- 
eral right and duty on the part of government to intervene, where- 
ever its intervention would be useful ; and when those who have 

"Adapted from Principles of Political Economy, Book v, chap, xi (1848). 



PROBLEM OF SOCIAL CONTROL 99 

been called the laissez-faire school have attempted any definite lim- 
itation of the pro'vince of government, they have usually restricted 
it to the protection of person and property against force and 
fraud ; a definition to which neither they nor any one else can delib- 
erately adhere, since it excludes some of the most indispensable and 
unanimously recognized of the duties of government. 

Whatever theory we adopt respecting the foundation of the social 
union, and under whatever political institutions we live, there is a 
circle around every individual human being, which no government, 
be it that of one, or a few, or of the many, ought to be permitted to 
overstep : there is a part of the life of every person who has come to 
years of discretion, within which the individuality of that person 
ought to reign uncontrolled either by any other individual or by the 
public collectively. That there is, or ought to be, some space in human 
existence thus entrenched around, and sacred from authoritative 
intrusion, no one who professes the smallest regard to human free- 
dom or dignity will call in question. 

Even in those portions of conduct which do affect the interest 
of others, the onus of making out a case always lies on the defend- 
ers of legal prohibitions. It is not a merely constructive or presump- 
tive injury tO' others, which will justify the interference of law with 
individual freedom. To be prevented from doing what one is in- 
clined to, or from acting according to one's own judgment of what 
is desirable, is not only always irksome, but always tends to starve 
the development of some portion of the bodily oi' mental faculties, 
either sensitive or active ; and unless the conscience of the individual 
goes freely with the legal restraint, it partakes, either in a great or 
in a small degree, of the degradation of slavery. 

A second general objection to government agency is that every 
increase O'f the functions developing on the government is an in- 
crease of its power, both in the form of authority, and still more, in 
the indirect form of influence. The public collectively is abundantly 
ready to impose, not only its generally narrow views of its interests, 
but its abstract opinions, and even its tastes, as laws binding upon 
individuals. And the present civilization tends so strongly to make 
the power of persons acting in masses the only substantial power in 
society, that there never was more necessity for surrounding indi- 
vidual independence of thought, speech, and conduct, with the most 
powerful defences. Hence it is no less important in a democratic 
than in any other government, that all tendency on the part of public 
authorities to stretch their interference should be regarded with un- 
remitting jealousy. ■ 



lOo CURRENT ECONOMIC PROBLEMS 

A third general oibjection to- government agency rests on the 
principle of the division of labour. Every additional function un- 
dertaken by the government is a fresh occupation imposed upon a 
body already overcharged with duties. A natural consequence is 
that most things are ill done; much not done at all, because the 
government is not able to do it without delays which are fatal to 
its purpose. 

I have reserved for the last place one of the strongest of the 
reasons against the extension of government agency. Even if the 
government could comprehend within itself, in each department, all 
the most eminent intellectual capacity and active talent of the nation, 
it would not be the less desirable that the conduct of a large portion 
of the affairs of society should be left in the hands of the persons im- 
mediately interested in them,. A people among whom there is no 
habit of spontaneous action for a collective interest who look habit- 
ually to their government to command or prompt them in all matters 
of joint concern have their faculties only half developed; their edu- 
cation is defective in one of its most important branches. There 
cannot be a corrtbination of circumstances more dangerous to human 
welfare than that in which intelligence and talent are maintained 
at a high standard within a governing corporation, but starved and 
discouraged outside the pale. Few will dispute the more than suffic- 
iency of these reasons, to throw, in every instance, the burden of 
making out a strong case, not on those who resist, but on those who 
recommend government interference. Laissez-faire, in short, should 
be the general practice ; every departure from it, unless required by 
some great good, is a certain evil. 

But we must now turn to the second part of our task, and direct 
our attention to cases, in which some of those general objections are 
altogether absent, while those which can never be got rid of entirely 
are overruled by counter-considerations of still greater importance. 

Can it be affirmed, for instance, that the consumer is the most 
i^ompetent judge oi the end? Is the buyer always qualified to judge 
of the commodity? The proposition can be admitted only with nu- 
merous abatements and exceptions. This is peculiarly true of those 
things w'hich are chiefly useful as tending to raise the character of 
human beings. The uncultivated cannot be competent judges of 
cultivation. Those who' most need to be made wiser and better 
usually desire it least, and if they desired it, would be incapable of 
finding the way to it by their own lights. In the matter of educa- 
tion, the intervention of government is justifiable, because the case 
is not one in which the interest and judgment of the consumer are 
a sufficient security for the goodness of the commodity. Let us now 



PROBLEM OF SOCIAL CONTROL lOi 

consider other cases, where, for one reason or another, governmental 
interference is necessary. These may be classed under several heads. 

First, the individual who is presumed to be the best judge of 
his own interests may be incapable of judging or acting for him- 
self ; may be a lunatic, an idiot, an infant ; or, though not wholly 
incapable, may be of immature years and judgment. In this case 
the foundation of the laissez-faire principle breaks down entirely. 
The person most interested is not the best judge of the matter, nor 
a competent judge at all. To take an example from the peculiar 
province of political economy;. it is right that children, and young 
persons not yet arrived at maturity, should be protected, so far as 
the eye and hand of the state can reach, from being over-worked. 
Freedom of contract, in the case of children, is but another word 
for freedom of coercion. Education also is not a thing which par- 
ents or relatives should have it in their power to withhold. 

But the classing together, for this and other purposes, of women 
and children, appears to me both indefensible in principle and mis- 
chievous in practice. Children below a certain age cannot judge or 
act for themselves, but women are as capable as men of appreciating 
and managing their own concerns, and the only hindrance to their 
doing so arises from the injustice of their present social position. If 
women had as absolute a control as men have over their own persons 
and their own patrimony or acquisitions, there would be no plea for 
limiting their hours of labouring for themselves, in order that they 
might have time to labour for the husband, in what is called his home. 
Women employed in factories are the only women in the labouring 
rank of life whose position is not that of slaves and drudges. 

A second exception is when an individual attempts to decide 
irrevocably now what will be best for his interest at some future and 
distant time. The practical maxim of leaving contracts free is not 
applicable without great limitations in case of engagements in per- 
petuity; and the law should be extremely jealous of such engage- 
ments. 

The third exception which I shall notice has reference to the 
great class of cases in which the individuals can only manage the 
concern by delegated agency, and in which the so-called private man- 
agement is, in point of fact, hardly better entitled to be called man- 
agement by the persons interested, than administration by a public 
officer. Whatever, if left to spontaneous agency, can only be done 
by joint stock associations, will often be as well, and sometimes bet- 
ter done, as far as the actual work is concerned, by the state. Gov- 
ernment management is, indeed, proverbially jobbing, careless, and 



I02 CURRENT ECONOMIC PROBLEMS 

ineffective, but so likewise has generally been joint-stock manage- 
ment. 

To a fourth cause of exception I must request particular atten- 
tion, it being one to which, as it appears to me, the attention of 
political economists has not yet been sufficiently drawn. There are 
matters in which the interference of law is required, not to overrule 
the judgment of individuals respecting their own interest, but to 
give effect to that judgment; they being unable to give effect to it 
except by concert, which concert again cannot be effectual unless 
it receives validity and sanction from, the law. For illustration I 
may advert to the question of diminishing the hours of labour. Let 
us suppose that a general reduction of the hours of factory labour, 
say from ten to nine, would be for the advantage of the work people ; 
that they would receive as high wages, or nearly as high, for nine 
hours' labour as they receive for ten. If this would be the result, 
and if the operatives generally are convinced that it would, the lim- 
itation, some may say, will be adopted spontaneously. I answer, 
that it will not be adopted unless the body of operatives bind them- 
selves to one another to abide by it. For however beneficial the ob- 
servance of the regulation might be tO' the class collectively, the 
immediate interest of every individual would lie in violating it : and 
the more numerous those were who adhered to the rule, the more 
would individuals gain by departing fromi it. 

Fifthly : the argument against government interference cannot 
apply to the very large class of cases, in which those acts of indi- 
viduals with which the government claims to interfere, are not 
done by those individuals for their own interest, but for the 
interest of other people. This includes, among other things, 
the important and much agitated subject of public charity. Though 
individuals should, in general, be left to do for themselves whatever 
it can reasonably be expected that they should be capable of doing, 
yet when they are at any rate not to be left to themselves, but to 
be helped by other people, the queston arises whether it is better that 
they should receive this help exclusively from individuals, and there- 
fore uncertainly and casually, or by systematic arrangements, in 
which society acts through its organ, the state. Other cases, falling 
within the same general principle, are those in which the acts done 
by individuals, though intended solely for their own benefit, involve 
consequences extending indefinitely beyond them, to interests of the 
nation or of posterity, for which society in its collective capacity is 
alone able, and alone bound, to provide. 

The same principle extends also to a variety of cases, in which 
important public services are to be performed, while yet there is no 



PROBLEM OF SOCIAL CONTROL 103 

individual specially interested in performing them, nor would any 
adequate remuneration naturally or spontaneously attend their per- 
formance. Take for instance a voyage of geographical or scientific 
exploration. It may be said, generally, that anything which it is 
desirable should be done for the general interests of mankind or of 
future generations, or for the present interests of those members 
of the community who require external aid, but which is not of a 
nature to remunerate individuals or associations for undertaking it, 
is in itself a suitable thing to be undertaken by government. 

The preceding heads comprise, to the best of my judgment, the 
whole of the exceptions to the practical maxim that the business of 
society can be best performed by private and voluntary agency. It 
is, however, necessary tO' add, that the intervention of government 
cannot always practically stop short at the limit which defines the 
cases intrinsically suitable for it. In the particular circumstances of 
a given age or nation, there is scarcely any thing, really important 
to the general interest, which it may not be desirable, or even neces- 
sary, that the government should take upon itself. Even, in the 
best state which society has yet reached it is lamentable to think how 
great a proportion of all the efforts and talents in the world are 
employed in merely neutralizing one another. It is the proper end 
of government to reduce this wretched waste to the smallest possi- 
ble amount, by taking such measures as shall cause the energies now 
spent by mankind in injuring one another, or in protecting them- 
selves against injury, to be turned to the legitimate employment of 
the human faculties, that of compelling the powers of nature to be 
more and more subservient to physical and moral good. 

50. The Authoritative Basis of Laissez-Faire 

There is nothing novel in the assertion that deference to author- 
ity is the most persistent and fundamental of the many aspects of 
the intellectual attitude, laissez-faire. True it is that the expression 
carries the idea of an industrial regime going its way, untrammeled 
by state interference. In fact its most obvious meaning seems to 
be a policy under which the individual shall be legally free to 
select his own occupation, choose his own business associates, em- 
ploy an industrial technique and organization which is to his own 
liking, and buy his materials and labor and market his wares on 
terms voluntarily made. Thus it means freedom for the individual 
in the immediate conduct of his business and the sale of, his wares. 

But it does not totally exclude authority. Many advocates of 
laissez-faire see nothing amiss in governmiental grants of public 



I04 CURRENT ECONOMIC PROBLEMS 

lands, subsidies, patents, or franchises. Many would permit the 
state to levy customs duties intended to check importations, raise 
prices, and increase the number of those engaged in protected in- 
dustries. All would allow the state to encourage commerce by im- 
proving transportation and credit facilities. It is perhaps not an 
overstatement to say that the advocate of laissez-faire regards as 
interference, not all political activity affecting industry, but only such 
as adversely affects business interests. 

Instances such as the above, however, are only passing 
phases of the situation. Penetrating and conditioning indus- 
trial activity at every point there is a tangled web of legal, 
political and social institutions. Among the legal institutions 
are the prohibition of physical violence in industrial activity, 
a recognition of private property rights, machinery for com- 
pelling the discharge of obligations voluntarily assumed, and pre- 
scribed forms for partnerships and corporations. Among the 
social institutions are a system of intangible and immaterial prop- 
erty rights, the manifestations of public and class opinion, a code of 
business ethics, and a system of collective action and the recog- 
nition of collective authority in individual industrial establishments. 
Upon these the advocate of laissez-faire of necessity takes an atti- 
tude. Since these institutions change slowly and are conceived 
of as indispensible, they have generally been regarded by the 
business man as a part of the unchangeable nature of things. There- 
fore laissez-faire formally says nothing about them. Yet its very 
silence is the best evidence of its unqualified approval of habitual 
legal and social institutions and its demand that the individual he 
hedged about with conventional authority. 

Not only is the province from which authority is excluded a 
narrow one, but even in that province laissez-faire is conceived 
of as a mere means for securing some desirable social end. Neither 
theorist nor layman, in formulating his reasons for supporting 
this policy, declares himself in favor of a purely acquisitive system, 
wherein the strong shall wax stronger at the expense of the weak. 
By the older School, whose aspirations for society were democratic, 
it was argued that the competitive struggle, under laissez-faire, 
resulted in the greatest good, not only to the highly successful few, 
but to every member of the social community. By the newer school 
the basis of whose theories is biological, and whose ideal is aris- 
tocratic, its justification is found in the elimination of the unfit, 
the perpetuation of the fit, and the tendency of society towards 
a higher cultural level. By some of the latter charity is 
strongly condemned, not because it strips the fit of some of the 



PROBLEM OF SOCIAL CONTROL 105 

earnings which the industrial struggle has brought him, but because 
the survival of dependants tends to lower the prevailing type of 
civilization. Into the merits of these theories this is not the place 
to go. Here it is enough to note that even its most extreme advo- 
cates do not conceive of laissez-faire as a theory of predation, nor 
seek to justify it by any benefits, however great, which it may con- 
fer on the individual. On the contrary, over and above him, a con- 
scious social end is set up, to the realization of which his activities 
must tend, and in view of which the policy itself is tO' be approved 
or condemned. 

51. The Unscientific Character of Laissez-Faire^^ 

BY J. K. CAIRNES 

Political Economy has to do with wealth. But what is the 
problem concerning wealth which it undertakes to solve? I think 
the prevailing notion is that it undertakes to show that wealth may 
be most rapidly increased and most fairly distributed, by the simple 
process of leaving people to follow the promptings of self-interest 
unrestrained either by the State or by public opinion. That is the 
doctrine of laissez-faire. I shall endeavor to show that the maxim 
of laissez-faire has no scientific basis whatever, but is at best a mere 
handy rule of practice. 

If the doctrine of laissez-faire is to be taken as a scientific prin- 
ciple, its implied assertion is this : that, taking human beings as they 
are, in their intellectual and physical surroundings, and accepting 
the institution of private property as commonly understood, the 
promptings of self-interest will lead individuals, in all that range 
of their conduct which has to do with their material wellbeing, 
spontaneously to follow that course which is most for their own 
good and for the good of all. You will at once see that it involves 
the two following assumptions: first, that the interests of indi- 
viduals are fundamentally the same, secondly, that individuals know 
their interests in the sense in which they are coincident with the in- 
terests of others, and that, in the absence of coercion, they will in 
this sense follow them. If these two propositions be made out, the 
policy of laissez-faire follows with scientific rigour. 

But can they be made out ? For my part I am disposed to accept 
the first one, that human interests, well understood, are fundamen- 
tally at one. But how as to this assumption that people know their 
interests in the sense in which they are identical with the interests 

"Adapted from "Political Economy and Laissez-Faire," in Essays in 
Political Economy, 240-252 (1873). 



io6 CURRENT ECONOMIC PROBLEMS 

of others, and that they spontaneously follow them in this sense? 
The advocates of laissez-faire usually argue that human interests are 
naturally harmonious ; therefore we have only to leave people free, 
and social harmony will result; as if it were an obvious thing that 
people know their interests in the sense in which they coincide with 
the interests of others, and that knowing them, they must follow 
them, as if there were no such things in the world as passion, preju- 
dice, custom, esprit de corps, class interest, to draw people aside 
from the pursuit of their interests in the largest and highest sense ! 
Here is the fatal flaw on the very threshold of the argument. Noth- 
ing is easier than to show that people follow their interest, in the 
sense in which they understand their interest. But between follow- 
ing their interest in this sense and in the sense in which it is coinci- 
dent with the interests of other people, a chasm yawns. That chasm 
in the argument of laissez-faire has never been bridged. 

To come tO' the important point, what is it that people under- 
stand to be their interests? What did landlords, as a class, under- 
stand to be their interests down to 1846, when they maintained the 
Corn Laws as indispensable to their rents, and the prop of their 
political power ? What do Irish landlords understand to be their in- 
terests when they are withheld only by fear of assassination from 
evicting their tenants to consolidate their estates? What did em- 
ployers in former days understand to- be their interests when they 
enacted statutes of laborers? Or, in more recent times, when a 
ten hours' act became necessary to protect women and children 
against the unscntpulous pursuit of gain? I ask if any one can 
seriously consider the state of things represented by these examples, 
and retain absolute confidence in his maxim of laissez-faire? 

The truly significant circumstance is that the policy expressed 
by laissez-faire has been steadily progressive for nearly half a 
century, and yet we have no sign of mitigation in the harshest 
features of our social state. Those ugly social features, those violent 
contrasts of poverty and wealth, that strike so unpleasantly the eye 
of every foreign observer in this country, are still painfully prom- 
inent. In a word, "the grand final result, the indefinite approxi- 
mation of all classes towards a level which is always rising," seems 
as yet scarcely nearer. This seems tO' me to- abate our confidence 
in laissez-faire as the panacea for industrial ills. 

There is no evidence to warrant the assumption that lies at the 
root of this doctrine. Human beings follow their interests according 
to their delights and dispositions; but not necessarily in that sense 
in which the interest of the individual is coincident with that of 
others or of the whole. It follows that there is no security that the 



PROBLEM OF SOCIAL CONTROL 107 

economic phenomena of society will always arrange themselves 
spontaneously in the way that is most for the common good. In 
other words laissez-faire falls to the ground as a scientific doctrine. 
At best it is a practical rule and not a doctrine of science. Like 
most other practical rules, it is open to numerous exceptions. 
Above all, it must never for a moment be allowed to stand in the 
way of the candid consideration of any promising proposal of 
social or industrial reform. 

E. THE PROTEST AGAINST INDIVIDUALISM 
52. The Tyranny of the Machine^* 

BY JOSEPH HARDING UNDi;RWOOD 

The modern "tripods of Hephaestus" — the spinning jenny, the 
mule, the loom — instead of serving as allies to human hands, speed- 
ily became masters of "hands." The undemocratic idea prevailed — 
laissez-faire, let me do as I please — "me" being a man with a hun- 
dred hands, which speedily became a thousand. The use of men, 
women, and children by factory-owners at the beginning of the nine- 
teenth century had all the advantages and none of the disadvantages 
of slave ownership. Starvation brought the wives and daughters 
of the workmen to the factories and, since only their labor and not 
their strength had to be bought, there was no waste in wearing them 
out. Half-naked women were harnessed to draw carts in the mines 
through passages two feet seven inches high ; children of seven 
worked twelve to fourteen hours a day in factories. There were 
regular traffickers in children of paupers. "In stench, in heated 
rooms, amidst the constant whirring of a thousand wheels, little 
fingers and little feet were kept in constant action, forced into un- 
natural activity by blows from the heavy hands and feet of the 
merciless overlooker and the infliction of bodily pain by instruments 
of punishment, invented by the sharpened ingenuity of insatiable 
selfishness."^^ They were fed the same food that the master gave 
his pigs. Irons were riveted to the ankles and chained to the hips 
of girls and women to keep them from running away. The suicides, 
the murdered, and the tired were buried secretly. No such cruelty 
was ever widespread under slavery. It would not pay. 

^* Adapted from The Distribution of Ownership, 52-53 (1907). 
^^Gibbins, Industry in England, 389. 



io8 CURRENT ECONOMIC PROBLEMS 

53. The Passing of the Frontier 

BY THOMAS B. MACAULAy" 

Despots plunder their subjects, though history tells them that, 
by prematurely exacting the means of profusion, they are in fact 
devouring the seed-corn from which the future harvest is to spring. 
Why, then, should we suppose that people will be deterred from 
procuring immediate relief and enjoyment by the fear of calamities 
that may not be fully felt till the times of their grandchildren? 

The case of the United States is not in point. In a country where 
the necessities of life are cheap and the wages of labor high, where a 
man who has no capital but his legs and arms may expect to become 
rich by industry and frugality, it is not very decidedly even for the 
immediate advantage of the poor to plunder the rich. But in coun- 
tries where the great majority live from hand to mouth, and in 
which vast masses of wealth have been accumulated by a compara- 
tively small number, the case is widely different. The immediate 
want is at particular seasons imperious, irresistible. In our own 
time it has steeled men to the fear of the gallows, and urged them 
on to the point of the bayonet. And, if these men had at their 
command that gallows, and those bayonets which now scarcely re- 
strain them, what is to be expected? The better the government, 
the greater is the inequality of conditions ; and the greater the in- 
equality of conditions, the stronger are the motives which impel the 
populace to spoliation. As for America, we appeal to the twentieth 
century. 

BY jame;s bryce:^'^ 

America, in her swift, onward progress, sees, looming on the 
horizon, and now no longer distant, a time of mists and shadows, 
wherein dangers may be concealed whose form and magnitude she 
can scarcely yet conjecture. As she fills up her western regions 
with inhabitants, she sees the time approach when all the best land 
will have been occupied, and when the land under cultivation will 
have been so far exhausted as to yield scantier crops even to more 
extensive culture. Although transportation may also then have be- 
come cheaper, the price of food will rise; farms will be less easily 
obtained and will need more capital to work them with profit; the 
struggle for existence will become more severe. And while the out- 
let which the West now provides for the overflow of the great cities 
will have become less available, the cities will have become immensely 

'■^Adapted from the essay on Mill on Government (1828). 

'^'^ Adapted from The American Commonwealth, 1st ed.. Ill, 662 (i 



PROBLEM OF SOCIAL CONTROL 109 

more populous ; pauperism, now confined to six or seven of the 
greatest, will be more widely spread ; wages will probably sink and 
work will be less abundant. In fact, the chronic evils and problems 
of the old societies and crowded countries, such as we see them in 
Europe today, will have reappeared on this new soil. 

BY PE;TSR J^INLEY DUNNS 

"Dpporchunity," says Mr. Dooley, "knocks at iv'ry man's dure 
wanst. On some men's dures it hammers till it breaks down th' dure, 
an' then it goes in an' wakes him up if he's asleep, an' afterwards it 
worrucks f'r him as a nightwatchman. On some men's dures it 
knocks an' runs away, an' on th' dures iv some men it knocks an' 
whin they come out it hits thim over th' head with an axe. But 
iv'ry wan has an opporchunity." 

54. The New Issues^^ 

BY WIIvIvIAM GARROTT BROWN 

The twentieth century is upon us. Americans are beginning to 
find themselves confronted with the questions which have already 
long beset older and more crowded countries. We can hardly doubt 
that certain new public issues which within the last two or three 
years have come very swiftly to the front have come to stay. We 
are not yet an old society, or a crowded country. But — the fron- 
tier is gone. We are in the situation of a man who, though still 
very young, has nevertheless reached maturity and come into full 
possession of his estate; of an estate vast, but yet of a vastness no 
longer incalculable, no longer uncalculated, and which is also ap- 
preciably impaired by the waste and extravagance of his youth. 

We face, therefore, the responsibility of maturity, of a more 
careful development and husbandry of our great demesne. The 
time of boundless anticipation is past. We have instead a sure sense 
of strength, but with it comes also at last the sense that even our 
strength, and our capacity for growth, have their limits. There is 
as yet no real pinch, no severe pressure or congestion; far from it. 
But the certainty that these things are in the future is at last borne 
in upon us by facts and warnings. That is enough to change our 
mood. We are taking up, and ought to be taking up, certain of the 
problems of "old societies and crowded countries," and the coming 
of these new problems has somewhat changed the aspect of certain 
others which, even with us, are old. 

^^Adapted from The New Politics and Other Papers, 6-28. Copyright 
by Eugene L. Brown. Published by Houghton, Mifflin & Co. (1914). 



no CURRENT ECONOMIC PROBLEMS 

The new issues all have this much in common : They are all at 
bottom economic, and economic in a very strict derivative sense of 
the word — all questions of national housekeeping, of the safeguard- 
ing, the development, and the distribution of our immense national 
inheritance. The rapid and revolutionary development of transpor- 
tation has transformed bewilderingly the entire field with which 
economic legislation must deal. It is not merely that we are ap- 
proaching the problems of older societies. These problems have 
taken on for us new aspects, aspects hardly known elsewhere, and 
a truly American vastness of range. We can and should profit by 
a close study of European experience. But the guidance we can 
get from older countries, however valuable, is limited. There are 
things which we must work out for ourselves ; for the new industry 
is much farther advanced with us, and much more firmly estab- 
lished, than with the older peoples. 

The particular new issue on which we can get the most guidance 
from Europe, and which is therefore the simplest of all, is that of 
conservation. To call that issue a question would be a misnomer. 
The only question should be of ways and means, and concerning these 
it will be some time before we exhaust the enlightenment to be got 
from European experience. In the matter of the national conserva- 
tion of the use of water-power, we have in the example of Switzer- 
land an admirable object-lesson. 

Concerning this there is hardly a question ; but there is an issue ; 
there is a conflict, a struggle; and the violence and magnitude and 
difficulty of it are greater than anywhere else in the world. That is 
so because nowhere else are private interests so well organized or so 
powerful, and nowhere else have they such opportunities to acquire 
control of the various means of wealth. There is thus an issue be- 
tween the permanent pubhc weal and the selfishness of individuals 
and groups. For there has come about a massing of great and little 
accumulations, and an organization of capital and industry under a 
few heads; so that the struggle is on behalf of the people against 
the combinations. To take an instance, the lumber kings were not 
slow to see how rapidly the country was being deforested. They 
looked ahead and bought timber lands everywhere. And it can 
hardly be questioned that, law arid usage remaining what they are, 
the same forces which have made for monopoly and against compe- 
tition in other things will monopolize the country's water-power as 
well. 



PROBLEM OF SOCIAL CONTROL iii 

The swift and universal rise in prices should serve to awaken us 
to the actual state of industry and exchange among us. Our awaken- 
ing to the necessity of economy is still but a part of the greater 
awakening to the true extent of the changes which have come* about 
in our industrial life. The field is so vast that only a superficial 
glance at the main features of the new order is here possible. 

The most striking and important fact — a fact which is in a way 
inclusive of the whole matter — is this : Competition, as we have 
known it in the past, the kind of competition on whose existence and 
continuance our law and usage concerning industry and property 
are largely based, is breaking down. Take any one of the dozens of 
articles in general consumption, and thorough investigation will 
very likely disclose that real and vital competition no longer prevails 
in its production or distribution. A combination of manufacturers 
makes it, a combination of common carriers fixes the charges of 
transporting it to market, and the original combination names the 
terms upon which the retail dealers may handle it. If investigations 
in prices go far enough I am sure they will also disclose such com- 
binations in the smaller communities as well. The dependence of 
the ordinary shopkeepers on the trusts for supplies is so widespread 
that the old law of competition has been in large measure nullified. 
The consumers, in fact, seem" to be the only industrial group which 
has so far failed to combine. It is impossible not to feel that the 
tendency is so universal as to mean unmistakably a new industrial 
order. 

What does this change mean for the individual as a part and 
member, an industrial unit, of the new order? Clearly, it means, 
and it must continue to mean until the system is somewhat modi- 
fied in his interests, less independence, a narrower range of oppor- 
tunity. There is no reason to believe that it means on the whole 
less comfort or a lowered standard of living. The contrary is more 
probably true. Neither does the change mean that the man of ability 
and ambition cannot rise. He can. A policy of promotions for 
merit is plainly to the interest of every great business. That great 
combinations have adopted that policy is the principal reason why 
they are so well served. But these things do not rid us of the fact 
that the coming of the new order has meant a loss of independence, 
of industrial freedom to the great mass of individuals. Their chance 
to rise is but one way — by obedience to the laws of the system to 
which they belong; and in the making of these laws they have no 



112 CURRENT ECONOMIC PROBLEMS 

voice. There is real independence only at the top ; and to reach the 
top is beyond the hopes of all but a very few. Clearly the new sys- 
tem is less democratic than the old. 

But to get a fuller conception of the change, we must go to the 
source of initiative and control in business, to the men who direct 
the capital of the country. For the principle of combination has 
made it possible for a few great capitalists to get control of the 
accumulated savings of hundreds of thousands of people of small 
means. A single great banking concern is charged with the direction 
of some six billion dollars variously invested, in manufacturing, in 
banking, in transportation, in mines, in many other ways. Such 
power could go far to corrupt the press. Less power has already 
corrupted legislatures ; has suborned executives ; has reached eVen 
the courts. 

Here is but the merest glance at the new conditions. But it may, 
I think, be sufficient to enable us to formulate the new issues. We 
are confronted with adapting the democratic principle to conditions 
that did not exist when American democracy arose : that is to say, to 
a field ho longer unlimited, to opportunities no longer boundless, and 
to an industrial order in which competition is no longer the control- 
ling principle, an industrial order which is, therefore, no longer dem- 
ocratic, but increasingly oligarchical.' To save itself politically, 
democracy must therefore extend itself into this field. Plainly, 
therefore, laissez-faire can no longer be its watchword. That was 
the watchword of the regime of competition. Democracy's task is 
twofold. It must secure for the people some kind of effective, ulti- 
mate control over the natural sources of all wealth ; and it must also 
secure, in an industrial system, no longer controlled by competition, 
protection and opportunity for the individual. 

The ancient warfare of democracy and privilege must be begun 
all over again, and with new tactics, new strategy. In the presence 
of the new issues many of the old issues will be altered. The old 
struggle over the tariff will be less a matter of sectional issues, less 
a matter of contrary economic theories, and more a phase of the 
great struggle between democracy and privilege. The old constitu- 
tional questions, thought forever settled, will reappear in new forms. 
The rights and powers of both the states and the nation must be 
scrutinized afresh. Before the end we may have to go still farther 
back and find for the common law itself, if not new principles, at 
any rate, new formulas. For I doubt if we shall end before we have 
revised many of what we thought our fundamental conceptions of 
property and of human rights. 



PROBLEM OF SOCIAL CONTROL 113 

F. THE THEORY AND PROGRAM OF SOCIAL 
CONTROL 

55. The Individualistic Basis of Social Control" 

BY THOMAS HILL GRE;e;n 

Freedom is valuable only as a means to an end. That end is the 
liberation of the powers of all men equally for contributions to a 
common good. No one has a right to do what he will with his own 
in such a way as to contravene that end. It is only through the guar- 
anty society gives him that he has property at all. This guaranty is 
founded on a sense of common interests. Everyone has an interest 
in securing to everyone else the free use and enjoyment and disposal 
of his possessions, because such freedom contributes to that equal 
development of the faculties of all which is the highest good for all. 
This is the true and only justification of the rights of property. 
Property being only justifiable as a means to the free exercise of 
the social capabilities of all, there can be no true right of property 
of a kind which debars one class of men from such free exercise 
altogether. We condemn slavery no less when it rises out of volun- 
tary agreement on the part of the enslaved person. A contract by 
which anyone agreed for a certain consideration to become the slave 
of another person we would reckon a void contract. Here, then, is 
a limitation upon freedom of contract that we all recognize as right- 
ful. No contract is valid in which human persons are dealt with as 
commodities, because such contracts of necessity defeat the end for 
which alone society enforces contracts at all. 

Are there no other contracts which, less obviously perhaps, but 
really, are open to the same objection? Let us consider contracts 
affecting labor. Labor, the economist tells us, is a commodity ex- 
changeable like other commodities. This is in a certain sense true, 
but it is a commodity which attaches in a peculiar manner to the 
person of man. Hence restrictions may need to be placed on its sale 
which would be unnecessary in other cases, to prevent it from being 
sold under conditions which make it impossible for the person selling 
it ever to become a free contributor to social good in any form. 
This is most plainly the case where a man bargains to work under 
conditions fatal to health. Every injury to the health of the indi- 
vidual is, so far as it goes, a public injury. It is an impediment to 
the general freedom ; so much deduction from our power, as mem- 
bers of society, to make the best of ourselves. Society, therefore, 

"Adapted from the "Lecture on Liberal Legislation and Freedom of 
Contract," in Works, III, 372-386. Edited by R. L. Nettleship {li 



114 CURRENT ECONOMIC PROBLEMS 

is plainly in its right when it limits freedom of contract for the sale 
of labor, so far as is done by laws for the sanitation of factories and 
mines. 

It is equally within its right in prohibiting the labor of women 
and young persons beyond certain hours. If they work beyond 
these hours, the result is demonstrably physical deterioration, which 
carries with it a lowering of the moral forces of society. For the 
sake of the general freedom of its members to make the best of them- 
selves, which it is the object of civil society to secure, a prohibition 
should be put on all such contracts of service as in a general way 
yield such a result. The purchase and hire of unwholesome dwell- 
ings are properly forbidden on the same principle. 

Its application to compulsory education may not be quite so ob- 
vious, but it will appear on a little reflection. Without a command 
of certain elementary arts and knowledge, the individual in modern 
society is as effectually crippled as by the loss of a limb or a broken 
constitution. With a view to securing freedom among its members 
it is certainly within the province of the state to prevent children 
from growing up in that kind of ignorance which practically ex- 
cludes them from a free career in life. 

Just as labor, though an exchangeable commodity, differs from 
all other commodities, land, too, has its characteristics, which distin- 
guish it from ordinary commodities. It is from the land that the 
raw material of all wealth is obtained. It is only upon the land that 
we can live ; only across the land that we can move from place to 
place. The state, therefore, in the interest of that public freedom 
which it is its business to maintain, cannot allow the individual to 
deal as he likes with his land to the same extent to which it allows 
him to deal with other commodities. It is an established principle 
that the sale of land should be enforced by law when public con- 
venience requires it. The landowner of course gets the full value 
of the land which he is compelled to sell, but of no other ordinary 
commodity is the sale thus enforced. This illustrates the peculiar 
necessity in the public interest of putting some restrictions on a 
man's liberty of doing what he will with his own. The question is 
whether, in the same interest, further restraint does not need to be 
imposed on the liberty of the landowner. Should not the state for 
public purposes prevent the land from being tied up in a manner 
which prevents its natural distribution and keeps it in the hands of 
those who cannot make the most of it ? It is so settled that at present 
all the land necessarily goes to the owner's eldest son. The evil 
effects of this system are twofold. It almost entirely prevents the 
sale of agricultural land in small quantities, and thus hinders that 



PROBLEM OF SOCIAL CONTROL 115 

mainstay of social order, a class of small proprietors tilling their own 
land. It also keeps large quantities of land in the hands of men who 
are too much burdened by debts to improve it. The landlord in such 
cases has not the money to improve, the tenant has not the security 
which would justify him in improving. On the simple and recog- 
nized principle that no man's land is his own for purposes incom- 
patible with the public convenience, we ask that legal sanction should 
be withheld from settlements which interfere with the distribution 
and improvement of land. 

To uphold the sanctity of contracts is doubtless a prime business 
of government, but it is no less its business to provide against con- 
tracts being made, which, from the helplessness of one of the parties 
to them, instead of being a security for freedom, becomes an instru- 
ment of disguised oppression. Men are not at liberty to buy and 
sell when they will, where they will, and as they will. There is no 
right to freedom in the sale or purchase of a particular commodity, 
if the general result of allowing such freedom is to detract from 
freedom in the higher sense, from the general power of men to make 
the best of themselves. The danger of legislation, either in the in- 
terests of a particular class or for the promotion of particular re- 
ligious opinions, we may fairly assume to be over. The popular 
jealousy of law is out of date. 

56. Social Reform and Self-Reliance-° 

BY W. LYON BIvE;ASE; 

The philosophical argument against Social Reform which has 
most weight is that by helping individuals the State deprives them 
of the disposition to help themselves, and they tend to rely more and 
more upon the social organization and less and less upon themselves. 
Everything in the way of public assistance is thus regarded with 
suspicion. To feed school-children is to weaken parental responsi- 
bility. To raise wages by legislation is as demoralizing as to dis- 
tribute doles. To offer a pension of five shillings a week in old age 
is to discourage thrift in youth. It is therefore better in the end 
that poverty should be allowed to run its course than that a mis- 
directed benevolence should demoralize the people. This argument, 
reproducing the logical individualism of the Utilitarians, has been 
greatly strengthened by Darwinism. Herbert Spencer has thus 
applied the theory of evolution to political affairs. "The well-being 
of existing humanity, and the unfolding of it into ultimate perfection, 

^"Adapted from A Short History of English Liberalism, 327-341. Copy- 
right by T. Fisher Unwin (1912)." 



ii6 • CURRENT ECONOMIC PROBLEMS 

are both secured through the same benificent, though severe, disci- 
pline to which the animate creation at large is subject; a felicity- 
pursuing law which never swerves for the avoidance of partial and 
temporary suffering. The poverty of the incapable, the distresses 
that come upon the imprudent, the starvation of the idle, and those 
shoulderings aside of the weak by the strong, which leave so many 
in shallows and in miseries, are the decree of a large, far-seeing 
benevolence." 

Yet, if there is one thing that most distinguishes modern from 
ancient society, and society of any kind from the disorganized exist- 
ence of primitive man, it is the prevalence of the idea that we are, 
in some measure, responsible for the condition of our neighbors. 
It would be at least surprising that the salvation of the race should 
now be found to lie in a deliberate reaction, against the movement 
of countless ages, towards the state of undisciplined human egotism. 
A doctrine so repugnant to what we have been accustomed to regard 
as our better feelings requires little examination to discover its fal- 
lacies. 

The evolutionary argument against Social Reform falls to the 
ground when it is once admitted that the individuals in contempla- 
tion are individuals organized in society, and that it is only so long 
as they are organized that development, as we understand it, can 
take place. If mankind were left tO' scramble for such good things 
as it could get without cooperation, the race would no doubt, in 
course of time, develop such characteristics as that competition 
would allow to survive. But if we erect higher standards, and re- 
quire, even from selfish motives, the moral, intellectual, and physical 
benefits which only organization, culture, and the communication of 
ideas will produce, the comparison between human beings and the 
rest of the animate creation is useless for our purpose. Some limit- 
ation of the struggle for existence is obviously needed, if we are 
not to fall back to the level where only the brute qualities of strength, 
swiftness, and cunning are of value. Once we admit the need of a 
social organization, which involves a very considerable check on 
mechanical evolution by the survival of the fittest, the only con- 
troversy is about the extent and character of the limits on competi- 
tion and not about their existence. 

But the argument for Social Reform is not based only upon the 
possibility of altering environment so that individuals who are unfit 
for it may maintain themselves as long as they live. It is not the 
incapable who are poor. It is not only the imprudent who are over- 
come by distress. It is not only the idle who starve. Bad conditions 
of life destroy not only the inefficient, but the efficient. He is a 



PROBLEM OF SOCIAL CONTROL 117 

very dull and stupid observer who supposes that all the slovenly, 
debauched, and criminal men and women whom he sees around him 
are what they are because of their innate qualities. A bad environ- 
ment does not merely destroy the inefficient, it manufactures them ; 
and it is as reasonable to oppose social reform because it prevents 
the elimination of the unfit, as it would be to defend excessive eating 
and drinking, or sitting in wet clothes. Unhealthy eating would no 
doubt destroy people with weak stomachs, but for every one who 
perished in this struggle with environment there would be ten who 
survived. Bad housing and bad wages produce the same results as 
bad habits. An ill-fed girl becomes the mother of weakly children. 
Casual labor kills only after it has given birth to an incalculable 
amount of laziness, vice, and mental disorder. The elimination of 
the unfit is uncertain and capricious. The deterioration of the fit 
is certain and remorseless. Reform is thus the only possible means 
for discovering what individuals are fit in the human sense. It is 
only when all have a chance of survival that we can distinguish 
between efficient and inefficient. The reformer is only evolution 
conscious of itself. 

This elaboration of social control is not inconsistent with such 
competition as is necessary for the development of character, and 
for the production of the wealth which is distributed among the 
members of society. It is not Socialism. It removes only some of 
the risks of failure, and only those which are beyond individual cori- 
trol. No man is made less thrifty because at the age of seventy he 
will receive five shillings a week. No man works the better for 
knowing that, if he is ever ill for a month, he and his family will 
never be free again, or will work the worse for knowing that his 
home will be kept together until he is able once more to support it 
by his own exertions. No woman gets any virtue out of working 
fifteen hours a day for seven days a week, with the knowledge that 
even then she will not earn enough to keep herself in food and cloth- 
ing without recourse to charity or prostitution, and her character 
will not be deteriorated when a level is fixed below which her wages 
cannot fall. The benefit of competition remains. The disasters in- 
evitably attendant on it are averted. The poorer people no longer 
wrestle on the brink of an unfenced precipice. 

We do not want to see impaired the vigor of competition, but we 
can do much to mitigate the consequences of failure. We want to 
draw a line below which we will not allow persons to live and labor. 
We want to have free competition upward. We do not want to pull 
down the structures of science and civilization ; but to spread a net 
over an abyss. Our aim is not to abolish competition. Competition 



ii8 CURRENT ECONOMIC PROBLEMS 

will always be powerful enough. But to limit the strife — to fix a 
ring around the prize-fight — to protect the vital parts from the blows 
of the combatants. Individual growth can only take place in compe- 
tition. But it is not necessary that failure in competition should be 
mortal. The struggle of competition is to go on. But it is not to go 
on to the death. Economic society is to be converted into a gigantic 
Trade Union, based upon the belief that the highest good of the indi- 
vidual can only be secured in cooperation with his fellows, and limit- 
ing his freedom only in so far as it is necessary to secure freedom to 
his associates. 

57. Laissez-Faire in Practice^^ 

BY Iv. T. HOBHOUSE 

In the main, the teaching of the school tended to a restricted 
view of the function of government. Government had to maintain 
order, to restrain men from violence and fraud, to hold them secure 
in person and property against foreign and domestic enemies, that 
they might rely upon reaping where they had sown, and might enjoy 
the fruits of their industry. 

The factory system early brought matters to a head at one 
point by the systematic employment of women and young children 
under conditions which outraged the public conscience when they 
became known. In the case of children it was admitted that the 
principle of free contract could not apply. It left the child to^ be 
exploited by the employer in his own interest. But this principle 
admitted of great extension. If the child was helpless, was the 
grown-up person, man or woman, in a much better position? Here 
was the owner of a mill employing five hundred hands. Here was 
an operative possessed of no alternative means of subsistence seek- 
ing employment. Suppose them to bargain as to terms. If the 
bargain failed the employer lost one man. At worst he might have 
a little difficulty for a day or twO' in working a single machine. 
During the same days the operative might have nothing to eat, 
and might see his children going hungry. Where was the effective 
liberty in such an arrangement? In the matter of contract true 
freedom postulates substantial equality between the parties. In pro- 
portion as one party is in a position of advantage he is able to 
dictate the terms. In proportion as the other party is in a weak 
position, he must accept unfavorable terms. Hence the truth of 
Walker's dictum that economic injuries tend to perpetuate them- 

^^Adapted from Liberalism, 81-101. Copyright by Henry Holt & Co. 
(1911). 



PROBLEM OF SOCIAL CONTROL 119 

selves. For purposes of legislation the state began with the child, 
where the case was overwhelming. It went on to include the young 
person and the woman. It drew the line at the adult male, and 
it is only within our own time that legislation has avowedly under- 
taken the task of controlling the conditions of industry. To this it 
has been driven by the manifest teachings of experience that liberty 
without equality is a name of noble sooind and squalid result. 

In place of the system of unfettered agreement contemplated., 
the industrial system which has actually grown up and is in pro- 
cess of further development rests on conditions prescribed by the 
state. The law provides for the safety of the worker and sanitary 
conditions of employment. It prescribes the length of the working 
day for women and children. In the future it will probably deal 
freely with the hoiurs for men. It makes employers liable for in- 
juries suffered by operatives. Within these limits it allows freedom 
of contract. 

The theory of laissez-faire asumed that the state would hold 
the ring. It would suppress force and fraud, keep property safe, and 
aid men in enforcing contracts. On these conditions men should 
be absolutely free to compete with each other, so that their best 
energies should be called forth. But why, on these conditions, just 
these, and no others? Why should the State insure protection of 
person and property? The time was when the strong man armed 
kept his goods, and incidentally his neighbor's goods too, if he could 
get hold of them. Why should the State intervene to do for a 
man that which his ancestors did for themselves? Why should a 
man who has been soundly beaten in physical fight go to a public 
authority for redress ? How much more manly to fight his own battle. 
Was it not a kind of pauperization to make men secure in person 
and property, through no efforts of their own, by the agency of a 
state machinery operating over their heads? Would not a really 
consistent individualism abolish this machinery? "But," the advo- 
cate of laissez-faire may reply, "the use of force is criminal, and 
the state must suppress crime." So men held in the ninteenth cen- 
tury. But there was an earlier time when they did not take this 
view, but left it to individuals and their kinsfolk to revenge their 
own injuries. Was not this a time of more unrestrained indi- 
vidual liberty. On what principle then is the line drawn, so as to 
specify certain injuries which the State may prohibit and to mark 
off others which it must leave untouched? 

Individualism as ordinarily understood, not only takes the police- 
man and the law court for granted. It also takes the rights of 
property for granted. But what is meant by the rights of property? 



I20 CURRENT ECONOMIC PROBLEMS 

In ordinary use the phrase means just that system to which long- 
usage has accustomed us. This is a system by which a man is free 
to acquire by any method of production or exchange, within the 
Hmits of the law, whatever he can of land, consumable goods, or 
capital; to dispose oi it at his own will and pleasure for his own 
purposes, to destroy it if he likes, to give it away or sell it as it 
suits him, and at death to bequeath it to whomsoever he will. The 
vState can take a part of a man's property by taxation. But in all 
taxation the State is taking something from a man which is "his," 
and in so doing is justified only by necessity. In many ways, in 
the face of actual conditions, the individualist has been driven to a 
change in property rights in the direction of greater social control. 
The school of Henry George, individualists though they be, would 
purge the social system of the private ownership of land. This 
alone, say they, will insure genuine freedom to all individuals. 

Thus iridividualism, when it grapples with the facts, is driven no 
small distance towards state regulation. Once again we have found 
that to maintain individual freedom and equality we have to extend 
the sphere of social control. We cannot assume any of the rights 
of property as axiomatic. We must look at their actual workings 
and consider how they affect the life of society. 

58. A Program of Social Reform^^ 

BY WOODROW WIIvSON 

We see that in many things our national life is very great. It 
it incomparably great in its material aspects, in its body of wealth, 
in the diversity and sweep of its energy, in the industries which have 
been conceived and built up by the genius of individual men and the 
limitless enterprises of groups of men. 

It is great, also, very great, in its moral force. Nowhere else in 
the world have noble men and women exhibited in more striking 
forms the beauty and the energy of sympathy and helpfulness and 
counsel in their efforts to rectify wrong, alleviate suffering, and set 
the weak in the way of strength and hope. 

We have built up, moreover, a great system of government, 
which has stood through a long age as in many respects a model 
for those who seek to set liberty upon foundations that will endure 
against fortuitous change, against storm and accident. Our life 
contains every great thing, and contains it in rich abundance. 

But the evil has come with the good, and much oi the fine gold 
has been corroded. 

^^ Adapted from the Inaugural Address, March 4. IQI3- 



PROBLEM OF SOCIAL CONTROL I2i 

With riches has come inexcusable waste. We have squandered 
a great part of what we might have used, and have not stopped to 
conserve the exceeding bounty of nature, without which our genius 
for enterprise would have been worthless and impotent, scorning 
to be careful as well as admirably efficient. 

We have been proud of our industrial achievements, but we have 
not hitherto stopped thoughtfully enough to count the human cost, 
the cost of lives sniffed out, of energies overtaxed and broken, the 
fearful physical and spiritual cost to the men and women and chil- 
dren upon whom the dead weight and burden of it all has fallen 
piteously the years through. 

The groans and agony of it all had not yet reached our ears, the 
solemn, moving undertone of our life, coming up out of the mines 
and factories and out of every home where the struggle had its inti- 
mate and familiar seat. With the great government went many 
deep secret things which we too long delayed to look into and scru- 
tinize with candid, fearless eyes. 

The great government we love has too often been made use 
of for private and selfish purposes; and those who used it had for- 
gotten the people. 

There has been something crude and heartless and unfeeling in 
our haste to succeed and be great. Our thought has been, "Let 
every man look out for himself, let every generation look out for 
itself," while we reared giant machinery which made it impossible 
that any but those who stood at the levers of control should have a 
chance to look out for themselves. We had not forgotten our mor- 
als. But we were very restless and in a hurry to be great. 

We have now come to^ the sober second thought. The scales of 
heedlessness have fallen from our eyes. We have made up our 
minds to square every process of our national life again with the 
standards we so proudly set up at the beginning and have always 
carried at our hearts. Our work is a v/ork of restoration. 

We have itemized with some degree of particularity the things 
that ought to be altered, and here are some of the chief items : 

A tariff which cuts us off from our proper part in the commerce 
of the world, violates the just principles of taxation, and makes the 
government a facile instrument in the hands of private interests ; 

A banking and currency system based upon the necessity of the 
government to sell its bonds fifty years ago, and perfectly adapted to 
concentrating cash and restricting credits ; 

And industrial system which, take it on all its sides, financial as 
well as administrative, holds capital in leading strings, restricts the 



122 CURRENT ECONOMIC PROBLEMS 

liberties, and limits the opportunities of labor, and exploits without 
renewing or conserving the natural resources of the country. 

A body oi agricultural activities never yet given the efficiency of 
great business undertakings or served as it should be through the 
instrumentality of science taken directly to the farm or afforded the 
facilities of credit best suited to its practical needs. 

Watercourses undeveloped, waste places unreclaimed, forests un- 
tended, fast disappearing, without plan or prospect of renewal, un- 
regarded waste heaps at every mine. 

We have studied as perhaps no other nation has the most effec- 
tive means of production, but we have not studied cost or economy 
as we should either as organizers of industry, as statesmen, or as 
individuals. 

Nor have we studied and perfected the means by which govern- 
ment may be put at the service of humanity, in safeguarding the 
health of the nation, the health of its men and its women and its 
children, as well as their rights in the struggle for existence. This 
is no sentimental duty. The firm basis of government is justice, not 
pity. These are matters of justice. 

There can be no equality of opportunity, the first essential of 
justice in the body politic, if men and women and children be not 
shielded in their lives, their very vitality, from the consequences of 
great industrial and social processes which they cannot alter, con- 
trol, or singly cope with. 

Society must see to it that it does not itself crush or weaken or 
damage its own constituent parts. The first duty of law is to keep 
sound the society it serves. 

Sanitary laws, pure food laws and laws determining conditions 
of labor which individuals are powerless to determine for them- 
selves are intimate parts of the very business of justice and legal 
efficiency. 

These are some of the things we ought to do, and not leave the 
others undone, — the old-fashioned, never-to-be-neglected, funda- 
mental safeguarding of property and of individual right. 

We shall deal with our economic system as it is and as it may be 
modified, not as it might be if we had a clean sheet of paper to 
write upon ; and step by step we shall make it what it should be, 
in the spirit of those who question their own wisdom and seek coun- 
sel and knowledge, not shallow self-satisfaction or the excitement 
of excursions whither they cannot tell. Justice, and only justice, 
shall always be our motto. And yet it will be nO' cool process of 
mere science. The nation has been deeply stirred, stirred by a sol- 



ii 



PROBLEM OF SOCIAL CONTROL 123 

emn passion, stirred by the knowledge of wrong, of ideals lost, of 
government too often debauched and made an instrument of evil. 

G. CONSERVATIVE FACTORS IN DEVELOPMENT OF 
SOCIAL CONTROL 

59. Arrested Constitutional Development^^ 

BY MYRON T. WATKINS 

As the thought and conduct of a people, reflecting and reacting 
upon their material conditions, are ever in flux, it follows that the 
ability to crystallize their thought into law with a fair degree of 
spontaneity is the condition of a stable institutional development. 
But the government of this country was conceived at a time when 
the individual was too far in the ascendent, when there was too little 
need of state activity, and when man had too freshly in mind the 
tyranny of England, for any opinion other than that government is 
a necessary evil to find expression in the American system. The 
government, accordingly, was to be hampered at every turn in the 
exercise of its authority. It was, moreover, considered to be like a 
machine whose function must be now and forevermore the same. 
Consequently it was believed that an arrangement of the parts that 
permitted the very limited functioning then needed should be fixed 
and made impervious to any subsequent change which might contem- 
plate a wider functioning. For had they not clearly in mind the 
evils attendant upon the exercise of large powers by the state? 

With this attitude toward government and law, the framers of 
the American government provided a rigid separation of the de- 
partments of government, an inflexible amendment clause, and a 
comprehensive Bill of Rights. Under the separation of depart- 
ments, there may be three very divergent policies all seeking to 
operate at the same time. Since the sponsors of none are respon- 
sible for the efficient functioning of the whole, and since there are 
no provisions for a means of co-ordination, it is apparent that the 
exercise of social control is very difficult. This lack of means of co- 
operation makes it possible, in almost any case, for any one of the 
three powers, from either conservatism, jealousy, or irresponsibility, 
to inhibit the operation of any administrative instrument or law, 
and thus make social control ineffectual if not impossible. An in- 
flexible amending clause is an expression of the belief that the 
functions of government do not change. This makes an extension of 
state powers to protect social interests very difficult. 

^^Adapted from an unpublished essay entitled, "The Regulation of Com- 
petition, a Means of Adjusting Industrial Development to Social Ideals." 



124 CURRENT ECONOMIC PROBLEMS 

The Bill of Rights was conceived to be an embodiment of all 
the "immutable laws of nature," which by some divine guidance the 
English-speaking peoples had struck upon. In fact, there are parts 
of these guaranties which have been so construed as to provide im- 
munities quite inapplicable to any other than a frontier society — 
where all men are economic "prime-movers," and where the limits 
to the improvement of land are unrealized. One illustration will 
suffice. That part of the Fifth Amendment which declares that 
"no person shall be deprived of . . . property without due 
process of law," while just and necessary if interpreted in view of 
the existing conditions, may operate to effect the very thing which it 
was intended to prevent, if applied without reference to a possible 
change in what constitutes property. Thus an act prohibiting cer- 
tain employers from discharging employees because of membership 
in a labor organization was declared unconstitutional,^* on the 
ground that the actions prohibited are part of the liberty of the em- 
ployer protected by the Constitution from limitation or regulation. 
Regardless of the technical merits of the decision, it manifests the 
disposition on the part of the courts to consider the relation of em- 
ployer and employee as it was on the frontier when there was much 
more equality of bargaining power. 

The chief reason for our inability to secure needed social con- 
trol has been that our political institutions have been hampered with 
defined, fixed, legal rights. As a result we have, on one hand, a gov- 
ernment which undertakes any action haltingly lest it overstep the 
bounds of its narrow function, or disturb the equilibrium of its self- 
imposed parts, and, on the other hand, a declaration of principles 
capable of wide or changing application, or of narrow and strict 
application. The result has been an ultra-conservative interpretation 
of rights and responsibilities by each of the three organs of govern- 
ment; each, fearing from its own jealous traditions to depart from 
its historic construction of powers by conceiving larger functions for 
themselves. If the state could have functioned as an organic whole, 
there seems no reason to believe that the rights and responsibilities 
embodied in the Bill of Rights would have been so arrested in their 
development. 

60. The Anti-Paternalism of the Governments^ t 

Paternalism, whether state or federal, as the derivation of the 
term implies, is the assumption by the government of a quasi-fatherly 
relation to the citizen and his family, involving excessive govern- 

^^Adair v. United States, 208 U.S. 161. 
^^ State V. Switsler, 143 Mo. 287 (1897). 



PROBLEM OF SOCIAL CONTROL 125 

mental regulation of the private affairs and business methods and 
interests of the people, upon the theory that the people are in- 
capable of managing their own affairs, and is pernicious in its ten- 
dencies. In a word, it minimizes the citizen and maximizes the state. 
Our governments are founded upon a principle wholly antagonistic 
to this. Our fathers believed the people capable of self-government. 
Such a government is founded upon a willingness and desire of the 
people to take care of their own affairs and an indisposition to look 
to the government for everything. The citizen is a unit. Under 
self-government we have advanced in all the elements of a greater 
people more rapidly than any nation that has ever existed upon the 
earth, and there is greater need now than ever before in our history 
for adhering to it. 

61. Industrial Freedom and Prosperity^*' 

BY JAMKS J. HIIvI. 

Among the radical and permanent, as distinguished from the 
partial and temporary, causes of bad times, one stands out pre- 
eminent by the volume of its effects and the persistence with which it 
has raged all over the country, namely, the legislative crusade against 
business. I speak here of no particular act, for the business inter- 
ests of the country as a whole have been under fire for more than 
ten years. The attack has steadily increased in violence and de- 
creased in discrimination. The ingenuity of restless minds has 
taxed itself to invent new restrictions, new regulations, new punish- 
ments for guilty and innocent alike. 

While existing laws were allowed to fall into more or less disuse, 
new laws were heaped on one another. Each of these invaded some 
new territory, laid the hand of authority upon some new occupation, 
drew closer the circle of business interference to bureaucracy. In- 
novation scarcely stopped short of declaring any distinct business 
success prima facie evidence of crime. The country is feeling the 
inevitable effect. 

When hostile regulation goes to this extent, without promise of 
limit to either its objects or its orders, business comes to a halt 
though tariff rates are raised to the skies. It cuts down present 
activity, and it puts a veto on all expansion. The present may be 
obscure, but the future looks black. For here industry begins to 
feel the indispensable effects of capital withdrawn, and to realize the 
effects that follow its withdrawal. 

^'Adapted from an address delivered before the Rochester Chamber of 
Commerce, December S, 1914. 



126 CURRENT ECONOMIC PROBLEMS 

Nowadays it is the fashion to overlook the claim of capital in 
production. The mistake is costly. For new plants will not be built, 
raw material will not be bought, wages cannot be paid unless capital 
is ready in sufficient quantities. It will be ready only on condition 
that it expects to earn at least a reasonable profit. There is no 
reason why it should take the risks present in even the most con- 
servative employment unless there is a possibility of commensurate 
profit. That possibiHty must have a promise of continuance suffi- 
cient to make it worth while to go into the enterprise at all. 

Now it is exactly these indispensables, a fair return and a reason- 
able lease of life, that continuous legislation against business has de- 
stroyed, or has threatened to destroy. Politicians have acted upon the 
theory that it is good to burn down your house because a chimney 
smokes. Fire has been started in many places. 

Our progress toward a centralized paternalism is so marked and 
has gone so far that the Socialist has little reason to complain that 
his party has not secured a majority. Every year sees the transac- 
tion of business made more expensive by laws prescribing multiplied 
and costly reports, ordering expensive improvements or additional 
services, laying new taxes, compelling the hiring of additional em- 
ployees. 

This is the history of paternalism, of centralization, since the 
beginning. Under the tribute it attempts to levy, business in the 
United States will eventually become unable to conform to the oner- 
ous conditions of the new era. It would be some compensation if 
the governing system were efficient. But it is as incompetent as it is 
expensive. This is not the fault of any man or party; it inheres 
in the method itself, and in the persistent American delusion that 
democracy can afford to overlook, in its selection of governing 
instruments, the question of fitness. Nowhere else outside the 
strictly barbarous countries is the idea that public place should pre- 
suppose some direct business qualification so contemptuously 
rejected. 

Industries which represent billions of capital, capital belonging 
largely to people of moderate means, are under the order of officials 
chosen for political reasons, many of whom could not earn on their 
merits a salary large enough to keep them alive in the service of the 
concerns which are now at their mercy. It is not malevolence, it is 
not corruption, that strikes at the heart of business so dominated ; 
it is the ignorance of well-meaning men who have been placed, for 
political considerations, where they do not belong, where they can 
do no good, and may be able to do immense harm. 



PROBLEM OF SOCIAL CONTROL 127 

It is a master-stroke of irony that while business all over the 
country has been spending time, effort, and money in an endeavor 
to realize efficiency, the governments to which it must render an 
account and whose orders it must obey remain the most striking 
examples of inefficiency to be found anywhere in the world. 

The main outlines of the business situation are clear. The 
country may enter, after the close of the European war, upon a 
period of remarkable prosperity. So it will be given the task of 
providing for a time for a maintenance of a considerable portion of 
the world's industry. The great and continued demand should be 
a guaranty of a corresponding prosperity. It would be so if no arti- 
ficial conditions intervened. But, to realize this, both capital and 
business initiative must have reasonable freedom. But it is less easy 
to take advantage of opportunities than ever before. At every 
promising opening industry sees a sign-board, erected by public 
authority, bearing the words ''No thoroughfare." If the next five 
years are to repeat the history of the last ten, there can be no gen- 
eral improvement and no general prosperity in the United States. 

These words are not spoken hopelessly. The American people 
have an enormous fund of underlying common-sense. It is funda- 
mentally conservative, though it loves to follow the circus parade 
once in a while, listen to the music, and applaud the clown. Since 
its own well-being is now definitely at stake, it is not unreasonable 
to hope that it will take a few simple steps toward the realization 
of its hopes. 

The first and indispensable requirement is a respite from attack 
for the business interests of the country. So great are its recupera- 
tive powers that probably one or two years of freedom from fore- 
boding as well as from assault would accomplish great things for 
industry. 

Subordinate the extension of the sphere of governing power to 
an improvement of its quality. It is time for all to remember that 
no man has a right to hold public office, from the top to the bottom, 
unless he has knowledge of that line of work. 

Rest from agitation, intelligent economy, efficiency, harmonious 
co-operation for business institutions as well as for political divi- 
sions — these are not abtruse ideas. They are things as long familiar 
and as little reverenced by the mass of men as the contents of the 
Decalogue. We must go back to them or suffer the penalty paid by 
every creative thing that defies the law of the physical or that of 
the moral order of the world. 



128 CURRENT ECONOMIC PROBLEMS 

62. Public Enemies^^ 

BY WAI.T MASON 

If you build a line of railway over hills and barren lands, 

Giving lucrative employment to about a million hands ; 

If you cause a score of cities by your right-of-way to rise, 

Where there formerly was nothing but some rattlesnakes and flies ; 

If when bringing kale to others you acquire a little kale, 

Then you've surely robbed the peepul and you ought to be in jail. 

If by planning and by toiling you have won some wealth and fame. 

It will make no odds how squarely you have played your little game ; 

Your success is proof sufficient that you are a public foe — 

You're a soulless malefactor ; to the dump you ought to go. 

It's a crime for you to prosper when so many others fail ; 

You have surely robbed the peepul and you ought to be in jail. 

Be a chronic politician, deal in superheated air ; 

Roast the banks and money barons, there is always safety there ; 

But to sound the note of business is a crime so mean and base. 

That a fellow guilty of it ought to go and hide his face. 

Change the builder's song triumphant for the politician's wail. 

Or we'll think you've robbed the peepul and we'll pack you off to jail. 

63. The Dominance of the Entrepreneur View-Point 

It requires no great familiarity with the political and economic 
history O'f England and the United States in the last hundred years 
to reveal the dominance of industrial interests in shaping legisla- 
tion. The men who have ruled the commercial world and created 
the industrial systems of these two countries have ostensibly been 
advocates of the policy of non-interference with industry. But in 
practice they have drawn the line only at legislation which adverse- 
ly affects business. They have never lost an opportunity to make 
a most active use of the machinery of government in furthering 
their own interests. A casual study of the legislation passed in this 
country during the decade ending in 1907 will show how potent has 
been the influence of this class. In general the legislation is in 
keeping with the interests of the producing classes; in particular it 
seems to have been shaped largely from the entrepreneur view-point. 
So dominant has the latter been as almost to preclude a considera- 
tion of legislation tending to general social betterment. Perhaps un- 
consciously, rather than consciously, has a view-point which con- 

^''Reprinted in the Commercial and Financial Chronicle, C, 177. from the 
Journal of Electricity, Power, and Gas (1914). 



PROBLEM OF SOCIAL CONTROL 129 

siders primarily the interests of only a small part of the people writ- 
ten itself into our political activity. But, even then, in a democracy, 
such as the United States, how has the view-point of a class become 
so powerful as to shape general legislation? 

The answer to the question must find a beginning in the technical 
changes which characterized the Industrial Revolution. The most 
significant of these was the replacement of the tool by the machine. 
A tool is a simple instrument, costing very little, useful for a number 
of different tasks, and depending for its success upon the skill of 
the laborer using it. A machine, on the contrary, is a complex of 
many parts, costing much in labor and accumulated wealth, useful 
for a highly specialized task, and depending for its success upon the 
nicety of its own mechanism. Where tools were universally used, 
the time of the productive process was short, productive establish- 
ments were many, and the laborer was quite independent. The cost 
of the machine, and the very small contribution which a single unit 
of product can contribute to it, prevent the machine from being 
used except in the production of a large number of units. But the 
specialization of the machine requires the use of a large number of 
machines in the production of a single article. Under machine pro- 
duction the economical industry is likely tO' be the one which differ- 
entiates the productive process into the largest. number of separate 
acts for each of which a machine is used. The modern industrial 
unit is likely to be large, making use of much capital, and employing 
many laborers. Because oi the peculiar adaptability of the machine 
to their needs, manufacturing, mining, transportation and industrial 
establishments have increased to great size, and have come to occupy 
positions of the highest importance. 

This vantage position becomes of all the more importance when 
we realize the purpose for which the business is being conducted and 
its relations to other industrial units. In form it is a corporation. 
There exists no necessary personal relation between the manage- 
ment O'f the corporation and the stockholders. This means that the 
investors are demiianding dividends ; that the management must pro^ 
duce dividends. It is, therefore, natural that the relationship be- 
tween the corporation's activities and social good is not kept in mind 
by those interested in the corporation's success. In the complex ar- 
rangement of modern business a social means has become an indi- 
vidual end. 

Relative to other businesses it occupies a strategic position. The 
productive process is a long one with many steps between the pro- 
duction of raw materials and the sale of the finished product. Only 
a few operations are performed by industrial concerns which make 



I30 CURRENT ECONOMIC PROBLEMS 

an extensive use of machinery. But the smaller concerns must se- 
cure regular dividends, and are, therefore, dependent upon the favor 
of the large concern. Unconsciously they come to share the attitude 
of the men directing larger businesses. The complexity of modern 
industry has also resulted in creating a number of subsidiary agents 
who perfo'rm general services which are necessities of the produc- 
tive process. Chief among these are the agencies of credit and in- 
vestment, banks, stock and produce exchanges, insurance companies, 
loan and mortgage associations. Since generally these institutions 
make their large profits from the operations of the entrepreneur 
class, and in many cases are creatures of mining, manufacturing, 
and transportation interests, those who control them naturally think 
in terms of entrepreneur interests. Among other subsidiary inter- 
ests are those of the legal, advertising, and newspaper pro'fessions. 
Constant association with the entrepreneur class, identity of pecuni- 
ary interests, and an unconscious imbibing of managerial habits of 
thought make the views of the legal class closely akin to- those of the 
industrial magnates. The growth of business has caused the news- 
paper to undergo a peculiar development. In its early history it was 
primarily a news-sheet, and was dependent for its success upon the 
faithfulness of its representation of the interests of the subscribers. 
Advertising was an incidental feature. Now the element of im- 
personality is distinctly marked in the news-vending business. The 
newspaper is owned by a corporation, the stockholders demand that 
dividends be forthcoming, and the management has noi alternative. 
For that reason the advertisement as a source of revenue has ap- 
pealed more and more tO' the business office. Now it is safe to say 
that a large subscription list is incidental to charging high rates for 
advertising. So it has come about that, consciously or unconsciously, 
the 'business office exercises considerable influence over the editorial 
and news policy of the paper. This has resulted in making a large 
part of the press a ready vehicle for the dissemination of informa- 
tion and opinions favorable to "big business." 

The position in M'hich the laborer is placed forces him to think 
largely in acquisitive terms. He sees in organization and in political 
activity a means for individual betterment. But wages for his labor 
he must receive regularly. In many cases the time-period in terms 
of which his thought processes run is no longer than a month, in 
many cases it extends only till Saturday night. So' far as his own 
labor is concerned, especially if he is skilled, the laborer is relatively 
immobile. It is too much to expect' him to vote in favor of a radical 
change in the industrial organization. His immediate interests are 



PROBLEM OF SOCIAL CONTROL 



131 



so inseparably bound up with those of his employer that to a large 
extent the latter's political views are his. 

Through a very elaborate differentiation of functions and an 
equally elaborate integration of parts, modern industrialism presents 
the appearance of a vast, intricate, and extremiely delicate machine. 
Its financial operations are carried on through the instrumentality 
of credit. So long as confidence holds out, the system moves along 
smoothly. But so soon as men lose confidence a train of activities is 
set in motion which may result in the destruction, at least tempor- 
arily, of the acquisitive powers of many classes. The very delicacy 
of this mechanism creates a fear of disturbing the present arrange- 
ments. ■ The business man feels that his interests are bound up with 
those of the large industrial and financial concerns, and for that 
reason he opposes innovation. The necessity for winning imme- 
diate profits deters him from favoring radical schemes. 

The stratification of society rests ultimately upon a pecuniary 
basis. The higher classes enjoy a prestige that causes the lower 
classes to imitate them in dress, in code of morals, in habit of 
thought, in political opinion. The position of men in the entrepre- 
neur class is very high. Their opinions upon all questions, particu- 
larly political questions, in which they have a peculiar interest, are 
likely to filter down through the various social strata which make 
up the state, and become a part of common-sense political philos- 
ophy. In the political system the legislator can better keep himself 
in office by favoring the local interests of his district than by work- 
ing for legislation for the general good. To the continuance of his 
political life the business man who occupies a strategic position in- 
dustrially, and who can make a substantial campaign contribution 
can contribute much. 

Other social currents, more subtle and harder to detect, also 
contribute to the dominance of the entrepreneur viewpoint. Ma- 
chinery has awed the human mind with a sense of its power and its 
strength. As a result to the modern mind the idea of size is almost 
identical with the idea of importance. To the superficial mind the 
large industrial establishment which employs many men is thought 
of as the cause of its laborers being employed. It appears that the 
factory or mill is an institution of Providence from which flows the 
blessings which the laborers' families realize through an expendi- 
ture of the wages paid out by it. We know that the coming of the 
machine multiplied individual productive powers, increased the size 
of economic incomes, and raised the general standard of living. 



132 



CURRENT ECONOMIC PROBLEMS 



Without going to the trouble of making nice distinctions one instinc- 
tively associates machine industr)'- with progress and regards in- 
dustries in which machinery is extensively used as really important, 
and looks upon those in which it is not so extensively used as old- 
fashioned, and of little social value. 

Machinery, too, favors the concentration of population, while 
non-mechanical industries favor its dispersion. This concentration 
brings into play all the sentimental forces which play about place, 
locality, and the city greatly to the advantage of local landowners. 
The manufacturing interests which make the city possible thus come 
to be regarded as necessary means to the realization of civic ends. 
The importance of these industries has in public thought been still 
further increased by what may be called the impersonality of cap- 
ital. The investment oi capital tends to separate itself from the 
personal business inclinations of its owner. To the extent that 
industry depends upon capital for success, the state or municipality 
can not secure the industry simply by an appeal to the personal 
tastes and local prejudices of the owner. Special privileges have to 
be offered. Thus the competition of local units results in a state of 
public opinion favorable to the interests of industries carried on on 
a large scale. 

Of course other forces are at work in moulding political opinion. 
Many other attitudes are mixing themselves into the complex nexus 
of the attitude of the public towards industry. Into these currents 
of opinion it is not our purpose to go. It may be that they will be 
crushed before the powerful blow of entrepreneur views. Or it 
may be that they will blend themselves with that viewpoint, modify 
it, and render it less acquisitive and more considerate of social in- 
terests. Only time can tell, 

64. The Futility of Utopian Legislation^® 
BY e;uhu root 

When proposals are made to change our fundamental institu- 
tions there are certain general conditions that should be observed. 

The first is that free government is impossible except through 
prescribed and established governmental institutions, which work 
out the ends of government through many separate human agents, 
each doing his part in obedience to law. Popular will cannot exe- 
cute itself directly except through a mob. Popular will cannot get 

^^Adapted from Experiments in Government and the Essentials of the 
Constitution, 11-22. Copyright by the Princeton University Press (1913)- 



■ PROBLEM OF SOCIAL CONTROL 133 

itself executed through an irresponsible executive, for that is autoc- 
racy. An executive limited only by the direct expression of popu- 
lar will cannot be held to responsibility against his will, because, 
having possession of all the powers of government, he can prevent 
any true, free, and general expression adverse to himself. We 
should, therefore, reject every proposal which involves the idea 
that the people can rule only by voting. 

A second is that in estimating the value of any system of govern- 
mental institutions due regard must be had to the true functions 
of government and to the limitations imposed by nature upon what 
it is possible for the government to accomplish. We all know that 
we cannot abolish all the evils in the world by statute, nor can we 
prevent the inexorable law of nature which decrees that suffering 
shall follow vice, and all the evil passions and folly of mankind. 
Law cannot give to depravity the rewards of virtue, to indolence 
the rewards of industry, to indifference the rewards of ambition, or 
to ignorance the rewards of learning. The utmost that government 
can do is measurably to protect men, not against the wrong they do 
themselves, but against the wrong done by others, and to promote 
the slow process of educating mind and character to a better 
knowledge and nobler standards of life and conduct. 

We all know this, but when we see how much misery there is in 
the world, and some things that government may do to miti- 
gate it, we are prone to forget how little, after all, it is possible for 
any government to do. The chief motive power that has moved man- 
kind along the course of development that we call the progress of 
civilization has been the sum-total of intelligent selfishness in a vast 
number of individuals, each working for his own support, his own 
gain, his own betterment. It is that which has cleared the forests 
and cultivated the fields and built the ships and railroads, made the 
discoveries and inventions, softened by intercourse the enmities of 
nations, and made possible the wonders of literature and art. Grad- 
ually, during the long process, selfishness has grown more intelligent, 
with a broader view of the individual benefit from the common good, 
and gradually the influences of nobler standards of altruism, justice, 
and sympathy have impressed themselves upon the conception of 
right conduct. But the complete control of such motives will be 
the millennium. Any attempt to enforce a millennial standard now 
by law must necessarily fail. Indeed no such standard can ever be 
forced. It must come, not by superior force, but from the changed 
nature of man. 

A third is that it is not merely useless but injurious for govern- 
ment to attempt too much. It is manifest that to enable it to deal 



134 CURRENT ECONOMIC PROBLEMS ' 

with the new conditions we must invest government with the author- 
ity to interfere with the individual conduct of a citizen to a degree 
hitherto unknown in this country. While the new conditions of in- 
dustrial life make it plainly necessary that many such steps shall be 
taken, they should be taken only so far as they are necessary and 
effective. Interference with individual liberty by government should 
be jealously watched and restrained, because the habit of undue in- 
terference destroys that independence of character without which, 
in its citizens, no free government can endure. Just so far as a 
nation allows its institutions to be molded by its weakness of char- 
acter rather than by its strength, it creates an influence to increase 
weakness at the expense of its strength. Undue interference by 
government is at the expense of individual initiative, energy, enter- 
prise, courage, independent manhood. 

A fourth is that in the nature of things all government must be 
imperfect because men are imperfect. Every system has its short- 
comings and inconveniences ; and these are seen and felt as they 
exist in the system under which we live, while the shortcomings and 
inconveniences of other systems are forgotten or ignored. It is not 
unusual to see governmental methods reformed and, after a time 
long enough to forget the evils that caused the change, to have a new 
movement for reform which consists in changing back to substan- 
tially the same old methods that were cast out by the first reform. 
The recognition of shortcomings is not in itself sufficient to warrant 
a change of system. There should be an effort to estimate and com- 
pare the shortcomings of the system to be substituted, for although 
they may be different they will certainly exist. 

A fifth is that, whatever changes in government are to be made, 
we should follow the method which undertakes as one of its car- 
dinal points to hold fast that which is good. When we take account 
of all that governments have sought to do and have failed to do in 
this world, we find as a rule that the application of new theories, 
though devised by the most brilliant constructive genius, have 
availed but little to preserve the people for any long periods from 
the evils of despotism on one hand or of anarchy on the other, or to 
raise any considerable portion of the mass of mankind above the 
hard conditions of oppression and misery. And we find that our 
system of government, built up in a practical way through many 
centuries, has done more to preserve liberty, justice, security, and 
freedom of opportunity, for many people for a long period, than 
any other system of government ever devised. Human nature does 
not change very much. The forces of evil are hard to control, as 
they have always been. It is easy to fail and hard to succeed in 
reconciling liberty and order. 



PROBLEM OF SOCIAL CONTROL 135 

H. THE BASIS OF NATIONAL EFFICIENCY 
65. Individualism and American Efficiency-'' 

BY ARTHUR SHADWELL 

The United States is new, partly developed, and untrammeled 
by traditions. It is not a homogeneous country, but a medley of 
peoples, nations, languages, creeds, and climates, having in daily 
life little in common but the mail, the currency, and the tariff. The 
British Empire itself hardly comprises a more heterogeneous racial 
assortment ; it has the white man, the black, the red, the yellow, and 
the hybrid ; the yellow includes most kinds of Asiatic and the white, 
every kind of European. Soil and climate are no less varied than the 
population; and though laws and social conditions exhibit more 
homogeneity, they yet exhibit large and numerous discrepancies. 
Still the United States is a nation, and the people possess some dis- 
tinctive national qualities, well worth considering. 

In general they are alert, inventive, ingenious, and adventurous 
beyond all other people, but hurried, careless, and unthorough. The 
merits of this temperament are more immediately obvious than its 
defects. The roar and bustle of industrial life in America, the ex- 
citement, the abundance of novelty, the enormous scale of operations, 
the boundless adventure, the playing with millions — all these im- 
press the mind and draw attention from the defects which they foster 
and conceal. An English workman who had lived for years in the 
heart of it, where the smoke is thickest, the roar of machinery loud- 
est, and the sound of millions most common, summed it up better 
than anyone I have met. "This is an adventurous country," he said ; 
"they think nothing of millions ; but it's all hurry-skurry work. Let 
her go ! Give her hell ! That's the word." 

The recklessness is magnificent, and I suppose that at present it 
is business ; but that is because the country is not yet filled up. There 
seem to be boundless possibilities within the reach of every man, and 
being generally intelligent, alert, and ambitious, they hurry to realize 
them. If a man fails today in one direction, no matter; he can try 
again tomorrow in another. 

The Yankee of old, as presented in literature, was an astute but 
deliberate person, saying very incisive things in a slow, drawling way, 
quick of mind, but slow of movement, not to be hurried, and much 
given to "whittling," which is not a very feverish and purposeful oc- 
cupation. Does anyone whittle now ? The present spirit arose with 

^"Adapted from Industrial Efficiency, I, 1-47 (1906). 



136 CURRENT ECONOMIC PROBLEMS 

the development of the railway system, which opened up the coun- 
try, poured in the population, brought the natural wealth to the 
market, and produced the millionaire. Since then industrial activity 
has gone with a rush. There was money to start industries and 
money to be made out of them. There were power and raw ma- 
terials in the ground; there was labor, skilled or unskilled, coming 
along all the time. And there was nothing to hinder; no enemies 
to watch, no army to keep up, perfect security and tranquillity. A 
great industrial expansion was inevitable; it could not help coming 
and bringing with it boundless possibilities of wealth. The million- 
aire multiplied, swelled to double, treble, tenfold his former bulk, 
and set such a glorious, shining, dazzling example that no man could 
behold it unmoved. Now in the United States there is "equality of 
opportunity," and all men with millionairedom in their souls — a 
numerous body — felt that even if they could not reach that height 
they might get near to it. So the scramble for money became the 
occupation of a large part of the people. Hence the commercial 
hurry-scurry. 

Trouble-saving, rather than time-saving, is characteristic of the 
Americans. It is the former, not the latter, that has an intimate re- 
lation to the distinctive qualities of their industrial success. The line 
in which they are supreme is the invention of labor-saving machinery. 
They possess an inexhaustible fertility in devising ingenious con- 
trivances for replacing toil. One explanation of this is the necessity 
of minimizing labor because of its high cost. No doubt that is a 
great stimulus, but there is more than that. There is a positive dis- 
like of processes involving physical exertion. Perhaps it is charge- 
able to mental activity and eventually traceable to climate. At any 
rate it exhibits the paradoxical combination of love of hurry and 
dislike of bodily exertion. 

These qualities have a weak side. They are fatal to thorough- 
ness and finish unless these can be attained by mechanical means, 
which is very rarely the case. For first-class work some plodding 
is required. It is surely remarkable that so little first-class work 
of any kind is produced in the United States, with all its wealth, 
population, intelligence, and educational keenness. All the recent 
discoveries of importance, from bacteria to radium, have come from 
Europe. The number who go into the professions is large, and they 
produce a great deal of a certain quality, but nothing really first 
class. They never carry anything to its legitimate development, to 
the point of being a masterpiece. What is wrong is an attitude of 
mind that has never gotten beyond adolescence. 

There is danger that slovenliness may become a national habit. 
"Slovenhness is something more than a violation of good taste ; it is 



PROBLEM OF SOCIAL CONTROL 137 

indifference to the best way of doing things ; it is a kind of easy- 
going morality in matters of method." "Let it go at that" seems to 
be written all over the face of the land. You see it in the slovenli- 
ness of their language ; in their affectation of slovenliness as a smart 
thing. You see it in wretchedly laid railway tracks, in swaying tele- 
graph poles, in sliding embankments, in broken-down vehicles with 
rickety wheels too slight for their work, in harness tied up with a 
string, in scamped and hurried work everywhere. There seems to 
be a disdain of thorough workmanship and detail in finish. 

The same national feeling is conspicuous in the factory and work- 
shop. You may see machinery racketing itself to pieces and spoiling 
the material in the attempt to run faster than it can; you see 
waste of fuel and steam, machinery clogged and spoiling for want 
of care and cleanliness, the place in a mess and the stuff turned out 
in a rough, badly finished state. When you see this over and over 
again, you begin to understand why the United States, with all its 
natural advantages, requires a prohibitive duty on foreign manu- 
factures which it ought to produce better itself. 

The Americans are a highly emulative people, and anxious to 
beat not only their competitors but themselves. "Beat our own rec- 
ord" is one of the mottoes. A different trait is embodied in another 
motto — "Don't grumble, boost." One method of boosting in Amer- 
ica deserves particular attention, that of advertisement. In this 
Americans lead the world so successfully that no competitor is in the 
running. Its development is assisted by the very curious trait of 
toleration of shams. Like the toleration of unfinished work with 
which it is connected, the toleration of shams is pervasive. It is 
illustrated in daily life by the pretense of a single class in railway 
traveling, by the use of such euphemisms as "help" for servant and 
"charity" for pauperism. Almost an affection for shams is shown in 
the encouragement given to every kind of imposture. America is 
the land above all others where everything that appeals to credulity 
and ignorance flourishes. It is there that new religions arise. It is 
there that the medical quackeries, the patent foods, the beautifiers, 
and all that gallery flourish most. I attribute this vogue to the 
boundless faith of Americans in their own country as the pioneer of 
civilization and enlightenment, to the wide diffusion of superficial 
education, and to the general contempt for the experience of man- 
kind at large. 

They have no reverence for what is old and proved outside their 
own borders. The mass of people believe that there is nothing to 
learn from other countries and that all things are possible in their 
own land. This feeling amounts to a superstition. In Europe, Ger- 
many, for instance, laws are made to be kept, and to that end they 



138 CURRENT ECONOMIC PROBLEMS 

are very carefully mjade. In the United States the general contempt 
for law is astonishing. I am inclined to think that it is the most 
salient feature of American civilization. Laws thought to be op- 
pressive are not obeyed ; they are evaded or defied. And I know 
no country in which laws that interfere with liberty of the indi- 
vidual are so common. They seem to be intended, not for the protec- 
tion of the public and the maintenance of order, but for the promo- 
tion of morality. Of course, they cannot possibly be enforced. 

The position of woman in America is peculiar, resting upon the 
accidental fact that there she is in a minority. The law of supply 
and demand gives her an effective advantage which the theory of 
equality enables her to utilize. In Europe, women are subordinated ; 
in America, they are dominant. In the former they take orders ; in 
the latter they give them. In the former the man is the boss ; in the 
latter, the woman. The ideal wife, I suppose, is at once a helpmeet 
and a stimulus. In Europe the former predominates ; in America, 
the latter. Each exercises a powerful influence on national life. In 
the former one of the largest elements of national strength is the 
domestic character of the women. In the latter the feminine stimu- 
lus is a great incentive to that strenuous application and restless en- 
terprise which stand out so strongly. Both characters have their 
weak points ; the helpmeet is likely to be blunted to a drudge, the 
stimulus to be sharpened to a goad. Of the two the latter is the 
greater evil. The spoiling of women, though it makes the men work, 
is not good for the women ; it fosters an exacting disposition, 
extravagance, love of amusement, and a distaste for domestic duties 
which threatens national vitality. And it reacts on the men, who 
console themselves elsewhere for exactions submitted to at home. 

But, as for America, there is, after all, a spirit in the air which is 
not all due to climate — the spirit of endeavor, of expansion, of be- 
lief in a great destiny in which every individual shares. It is an in- 
spiring atmosphere. 

66. German Socialized Efficiency^" 

BY SAMUEI. P. ORTH 

Is Germany a model for our democracy? What price is she 
paying for her well advertised efficiency? How is her paternalism 
afit'ecting human nature? 

The lure is a socialized Germany. The State owns railroads, 
canals, river transportation, harbors, telegraphs, and telephones. 

'"Adapted from an article in The World's Work, XXVI, 315-321. Copy- 
right (1912). 



PROBLEM OF SOCIAL CONTROL 139 

Banks, insurance, pawnshops, are conducted by the State. Munici- 
pahties are landlords of vast estates; they are capitalists owning 
street car lines, gas plants, electric light plants, theatres, markets, 
warehouses. The cities conduct hospitals for the sick, shelters for 
the homeless, soup-houses for the hungry, asylums for the weak and 
unfortunate, nurseries for the babies, homes for the aged, and cem- 
eteries for the dead. 

Add to this the vast and complex system oi State education, a 
system of training that aims at livelihood. Nothing like the per- 
fection, the drill, and the earnest, unsmiling efficiency of these ele- 
mentary and trade schools exists anywhere else in the world. In 
1907, there were 9,000,000 children in the elemientary schools, taught 
by 150,000 teachers, nearly all masters, as the "school ma'am" does 
not flourish in the Kaiser's realm. Every one of these pupils is 
headed for a bread-and-butter niche in this land of super-orderli- 
ness. And more than 300,000 persons are employed by the State 
in some form oi educational work, training the youth into adept- 
ness, in all sorts of schools. 

The army, as well as the school, brings home to every German 
family the fact that the State is watchful — and jealous. It demands 
that two full years of every young man be "socialized"; and the 
peasant woman and the artisan's wife must contribute her toil to 
the toll that the vast system of State discipline demands. 

Even the Church, that form of organized social effort which is 
everywhere first to break away from the regimen of the State, re- 
mains "established." So I might continue through almost every 
activity — the vast system of State railroads, mines, shipyards — and 
include even art and music. 

This socialized Germany is also an industrialized Germany. 
Everyone knows how cleverly advertised are German goods. But it 
is always well tO' remember that this race of traders and manufac- 
turers has somehow, in one generation, come from a race of solid 
scholars, patient artisans, and frugal peasants. The old Germany 
has disappeared ; the Germany of the spectacles, the shabby coat, 
and the book ; the Germany of Heidelberg and Weimar. A new 
order has taken its place. As you ride in the great express, from 
Cologne to Berlin, you never are out of sight of clusters of tall, 
smoking chimneys.' Symbolic of the new Germany are the Deutsche 
Bank, the trade of Hamburg, and the steel works of Essen, 

Now, how has it been possible to make this transformation? To 
create out of a slow, plodding, peasant-artisan people an industrial- 
ized population, out of a race of scholars a race of manufacturers ; 



I40 CURRENT ECONOMIC PROBLEMS 

to fill a land no larger than one half of Texas with 65,000,000 peo- 
ple who are breeding at the rate of nearly a million a year, and to 
engage the State in doing all sorts of things for these thriving fam- 
ilies? It is the political miracle of the century, and its socialized 
efficiency is the talk of the hour. How has it been accomplished? 

The Kaiser has adapted, line for line and point for point, the 
pattern of medieval feudalism tO' the exigencies of modern indus- 
trialism!. So, tO' begin with, the Kaiser has an obedient people, in 
whom the feudal notion of caste is second nature. Every one has 
his place, and shall keep it. Such shifting as now is tolerated is 
due tO' wealth and tO' the kind of ambition which luxury always 
awakens. 

You cannot have superimiposed classes without obedience. The 
average German is docile, and wants to be told what to do. 

The Government has its eager hands in every pocket, its anxious 
fingers on every pulse. From the cradle tO' the grave, the State 
watches the individual, commands him' and, in a way, cares for him ; 
always seeing tO' it that he has a place in the national economy and 
that he keeps it. 

To an outsider, of course, the inner workings of the mind and 
heart are hidden. But the outer aspect of the German State is per- 
fectly patent. It is mechanism — there can be no doubt about it — 
the mechanism of the solar system. It is a land where every mem- 
ber of Society has an ordained orbit and moves in it around the 
central sun, the State, which radiates a mystic gravitation into every 
activity — almost every thought — of every man, woman, and child. 

Here you see the mo^st varied activities held to the ideals of 
efficiency through a perfected feudalisms So that all Carl and John 
need to do is to obey ; then they are taught the rudiments O'f learn- 
ing and a trade, are insured against the most disturbing episodes 
of life, assured also of some leisure, considerable amusement, and 
a decent burial. And that is life ! 

Of all invented contrivances this German machine is the most 
amazing, this vast enginery of State with the patents of Hohenzol- 
lern, Bismarck, & Co. on every part, that has reduced the life of a 
great people to complacent routine and merged the rough eccentrici- 
ties of all into a uniformity of effort and ambition. 

It is true that John and Carl can live their ordered lives in rou- 
tine and contentment, rounding out year after year of plodding toil, 
paying their dues to the various funds and their taxes tO' the Gov- 
ernment, rearing their families, and entrusting them to the same 
over-care. But what sort of creatures does it make of John and 
Carl, and of their children and their childrens' children? 



PROBLEM OF SOCIAL CONTROL 141 

There is no exact way, not even a German way, of measuring 
originality, individual initiative, and independence. But this also 
is certain: patience, obedience, minute training, do not foster dar- 
ing and versatility. John and Carl settle down, literally settle down, 
to an uneventful life, looking forward to no change, taking no risks, 
seeking no alternatives. Once a butcher, always a butcher. This 
makes Germany depressing to a restless American who is always 
willing to "go it alone'' and to get "a run for his money." 

Some years agO', Mr. Ludwig Max Goldberger gave his country- 
men the cheering news that Americans need not be feared, because 
"all that they have done, we can imitate." This is an actual policy, 
I have been told by American manufacturers that they have found 
their machines so exactly copied in German shops that only the ab- 
sence of the patent dates and of the name of the makers told them 
that the machines were not made in the American shop. Already 
this land of drill and obedience is becoming an empire of conscious 
imitators. 

There are on the German horizon ominous portents. First I 
should place the moral and psychological effects of luxury. Few 
nations can stand the sapping suction of plenty. The effect of the 
profligacy that is everywhere apparent in the New Germany will be 
particularly swift and fatal in a people who for generations have 
been frugal and plain. 

On top of this wealth is an imperial debt that has risen from 
$490,000,000 in 1901 to $1,345,000,000 in 1912; this without reckon- 
ing the provincial and municipal debt which is four times larger 
than the imperial. The burden of taxation in 1912 was $70 per 
average family. 

And on top of this burden of debts sits the militarist, 1911-12, 
taking 622,520 young men out of the fields and factories for the 
standing army. This year 130,000 more are to be called out; and a 
new and unheard-of war program is proposed to this patient and 
obedient people. One must admire alike the audacity of the pro- 
posal, the patriotism of the voter, and the magnificent discipline that 
has wrought such submissiveness. 

The red omen is the most conspicuous. Socialism is skillfully 
combining the revolt against this imperial, personal Government, 
and the desire of the workman for a greater shqre of the wealth of 
the land. 

If a revolt succeeds, what will happen to this centralized bureau- 
cracy? What will become of the system of state aid and municipal 
socialism ? For without an efficient bureaucracy you cannot have an 



142 CURRENT ECONOMIC PROBLEMS 

effective paternalism; and without centralized administration you 
cannot run railroads, theatres, and pawnshops. 

It is the one point usually overlooked by the enthusiasts. They 
paint glowing pictures of socialized Germany, but they fail to look 
under the surface. Germany's system is built upon discipline ; hard, 
military, iron discipline, that grips every baby in its vise and forces 
every man into his place; a benevolent tyranny, no doubt, but nev- 
ertheless a tyranny ; an efficient feudalism, but none the less a feud- 
alism of self-conscious caste and fixed tradition. 

No doubt the time has come when we must modify our system 
of extreme individualism! by some system of social cooperation. 
How far shall we proceed in this path of socialized efficiency? Are 
we willing to pay the German price? Could we do it even if we 
wished to? Only a few peoples are fitted for such rigor. I believe 
that America would be a poor place for a Hohenzollem efficiency 
test. The carefully trained American barber would quite suddenly 
take it into his head to be a sailor or a constable, and "all the king's 
horses and all the king's men" couldn't hold him to his economic 
predestination. 

When all has been said, I cannot escape the conviction that the 
real significance even of Germany is not in what the State has done 
for the workman but what the German workman has succeeded in 
doing for himself, in spite of the State. 

This brings us back to the first postulate of Anglo-Saxon indi- 
vidualism: the basis of social cooperation is self-help. 



IV 

THE PECUNIARY BASIS OF ECONOMIC 
ORGANIZATION 

"The industrial system in which we live is without order, plan, and sys- 
tem ; its name is Chaos," asserts our socialist friend. In a lecture on "The 
Relation of Political Economy to Natural Theology," an English divine says 
in substance, "The almost perfect way in which, without conscious inter- 
vention, our multifarious industrial activities are co-ordinated into a system 
that satisfies our needs bears evidence of the mysterious way in which God 
moves 'his wonders to perform.' " These antagonistic opinions raise some 
of the most pertinent questions connected with the organization of society. 
Is our economic world one of order? Can industrial organization maintain 
itself without authoritative interference? Is the "automatic" organization 
of society the most economical? Can it be supplemented, controlled, or 
superseded? Does it serve, or can it be made to serve, the requisite ethical 
ends? In this division attention is given only to the more immediate aspects 
of these general problems. A consideration of the factors of a develop- 
ing society which complicate them must be reserved to the next division. 

The first question can be given a definite affirmative answer : our system 
is possessed of order. The nicety with which men and "jobs," capital and 
opportunities for investment, and supply of and demand for goods are 
brought together attests this. An examination reveals in our scheme of 
prices an admirable mechanism for preserving this organization. Rising 
prices attract capital, labor, or goods ; falling prices repel them. Back of 
this we find an active organizing agency in pecuniary competition. Further 
examination shows that our system is admirably adapted to manipulation 
through price changes. Labor, capital, and goods are mobile ; the industrial 
technique is plastic; and our scheme of values has translated itself very 
largely into pecuniary terms. We have also devised several special contriv- 
ances which tend to eliminate personal factors and make easier the exer- 
cise of the motivating power of price. Of these the corporation is typical. 
It reduces economic judgments to the cold calculus of dollars. It has split 
up business opportunities into bits small enough to fit the pocket-book of 
the most insignificant investor ; it has distributed the risks of industry in 
accordance with the whims of different classes of capitalists ; and it has served 
to place capital under the control of the pecuniarily ablest managements. It 
has, perchance, more than once freed the pecuniarily unfit from the burden 
of his possessions. 

The second question can definitely be answered in the negative. The 
system cannot maintain itself without authoritative interference. The state 
must preserve "law and order," maintain the integrity of basic institutions, 
provide an efficient monetary system, keep free the channels of trade, and act 
as arbiter in industrial disputes. The various trades must have their bodies 
of developing custom. The constraints of social usage must give at least a 
modicum of order to the wants of consumers. Yet the important role of 
authority in industrial organization is often lost sight of and competition 
itself is denounced as "ruthless." This judgment springs from a confusion 
of competition and laissez-faire ; of the process of organization and the 
fundamental institutions which condition it. The "plane" of competition can 

143 



144 CURRENT ECONOMIC PROBLEMS 

be authoritatively determined, even though competition be left "free." Ac- 
cordingly the ethical character of the result depends, not on the fact of com- 
petition, but on "the rules of the game." 

The third question cannot, at least at this stage of Our study, be answered 
definitely. More than one industrial activity has been pronounced uneconom- 
ical and its personnel parasites. It requires little effort to think of many 
trades or vocations which for a time have enabled their devotees to reap 
without sowing. Such methods of acquiring "easy money" necessarily in- 
volve "economic waste," and should be forbidden. Frequently "middlemen" 
and "speculators" are consigned to this class of unproductive and unprofitable 
servants. Analysis shows that both perform very necessary functions in the 
organization of the market. But this does not dispose of the question of 
economy in organization. It may well be that there are too many "middle- 
men" ; that there is a waste of our limited social resources at this point. 
And it is doubtless true that speculation frequently degenerates into gambling. 
If so, two problems are presented : Can the waste of resources in mercan- 
tile pursuits be checked without interfering with efficiency in service? Can 
speculation be stripped of gambling without interfering with the performance 
of its organizing functions? Almost as often the economy of the system as 
a whole is called into question. Our attention is directed to the "wastes of 
competition" ; and it is urged that these wastes can be eliminated either by 
a policy of "regulated monopoly" or by "the socialization of industry." A 
consideration of these delicate problems of economic organization will have 
to be postponed until later in our study. 

The fourth question involves several questions which cannot be answered 
in a single statement. The evidence seems to be against society's being able 
arbitrarily to fix prices that are greatly at variance with "natural" prices. 
The wholesale prescription of a scheme of prices is a very complex ques- 
tion; it practically involves a socialization of industry; economists generally 
would pronounce against it. However, it seems evident that prices can be in- 
directly changed by means of controlling demand or supply. This indirect 
attempt to interfere with prices is characteristic of monopoly, of trade- 
unionism, and of such proposals as, say, a minimum wage coupled with a 
control of immigration. It will reappear in connection with each of these 
problems. Finally, as we have already seen, society can exercise an influence 
over the institutional situation within which price-fixing occurs. 

The fifth question we must pass by. We cannot pronounce an ethical 
judgment upon the organization of the present system until we have had a 
chance to study both the problems referred to in this section and many others. 
It may perchance be that even then we will hesitate to pronounce a judgment. 

A. PRICE AS AN ORGANIZING FORCE 
67. The Social Order^ 

BY Edwin cannan 

Somje would have us beUeve that at present there is in society 
no organization at all. They use hard words, such as "scramble for 
wealth," "suicidal competition," "exploitation," "profit-hunting," and 
say that the present state of things is "chaotic." Now, whatever our 
present state may be, however unsatisfactory it is, it is certainly not 

^Adapted from Wealth: A Brief Explanation of the Causes of Economic 
Welfare, 72-75 (1914). 



PECUNIARY ORGANIZATION I45 

chaotic. If it were really chaotic, everyone who goes to his daily 
work tomorrow must be a fool, since he would be just as likely to 
get his daily bread if he stayed at home. The very fact that we all 
know as well as we do that certain results will almost inevitably fol- 
low upon a certain course of action shows that we are not living in 
chaos. Our system may be a bad system, but it is a system of some 
sort; it is not chaos. If a man holds a book too close to his nose 
he cannot read it, and so it is with the world of industry. If we look 
at it from too close a standpoint we can only see a blur. 

Let us imagine a committee of the Economics Section of the As- 
sociation for the Advancemient of Science of the planet Saturn re- 
porting on what they had been able to see of affairs on our planet 
through a gigantic telescope big enough for them to see human 
beings moving on its face. Would they be able to report that poor 
Mundus seemed quite chaotic? Would they report that everyone 
was scrambling for himself to the disadvantage of everyone else 
in such a way that the general good seemed entirely neglected? 
Would they say that all the land in the most convenient situations 
was lying idle, that nobody had a roof over his head, and that every- 
one was running about aimlessly or sitting idle in imminent danger 
of starvation? They might report something of the kind if they 
could carry on conversations with certain people here and if they 
believed all they were told, but certainly not if they judged by their 
own observation. 

They would be more likely to report that they had seen a very 
orderly people co-operating on the whole with a wonderful absence 
of friction — that they had seen them come out of their homes in the 
morning in successive batches and wend their way by all sorts of 
means of locomotion to innumerable different kinds of work, all of 
which seemed somehow to fit into each other so that as a whole the 
vast population seemed to get fed, and clothed, and sheltered. They 
would not, of course, vouch for the perfection of the arrangements. 
They would see that there were occasional irregularities and hitches. 
They might see now and then too many vehicles in one street, too 
many passengers trying to travel by one train or tramcar. They 
might even see along the country roads the melancholy spectacle of 
men tramping in both directions in search of the same kind of work. 
They might be able to see that some had too much — more than they 
seemed to know how to dispose of without hurting themselves and 
others — while some evidently had too little for healthy and happy ex- 
istence. But in spite of these defects they would report, I think, 
that on the whole the machinery, whatever its exact nature, seemed 
to do its work fairly effectively. 



146 CURRENT ECONOMIC PROBLEMS 

And if we can imagine them able to go back five hundred or a 
thousand years, we can feel tolerably sure that they would report 
still more favorably, since they would then see the enormous im- 
provement which had taken place and would discover no appearance 
of any change which would suggest that the existing system is not 
the outcome of an orderly development of the institutions of the past. 

I insist so strongly on the fact that our existing machinery does 
work, not with any idea of contending that all is for the best in the 
best of all possible worlds, but because to understand economics it is 
necessary to begin by considering, not the defects in the machinery, 
but the main principles involved in its construction and working. 
We are likely to begin with the defects because it is they which strike 
our eye and excite our sympathy. Seven per cent of unemployed are 
much more likely to make us start thinking than ninety-three per cent 
who are in employment. The emaciated corpse of a single person 
starved to death naturally makes more impression on our minds than 
the comfortable bodies of a hundred thousand sufficiently fed citi- 
zens. But if we want to understand the reason why work and food 
do not quite "go round," we should begin by endeavoring to discover 
what, after all, certainly does not explain itself — why they go as far 
round as they do. 



68. Com.petition and Industrial Co-operation" 

BY RICHARD WHATEI^Y 

"Bees," said Cicero, "do not congregate for the purpose of con- 
structing a honeycomb ; but, being by nature gregarious animals, com- 
bine their labors in making the comb. And man, even more so, is 
formed by nature for society, and, subsequently, as a member of 
society, promotes the common good in conjunction with his fellow- 
creatures." Most useful to Society, and much to be honored, are 
those who possess the rare moral and intellectual endowment of an 
enlightened pubHc spirit ; but, if none did service to the Public except 
in proportion as they possessed this. Society, I fear, would fare but 
ill. As it is, many of the most important objects are accomplished 
by the joint agency of those who never think of them, nor have any 
idea of acting in concert; and that with a certainty, completeness, 
and regularity which probably the most diligent benevolence, under 
the guidance of the greatest human wisdom, could never have ob- 
tained. 

^Adapted from Introductory Lectures on Political Economy, 26. ed., 90- 
98 (1832). 



PECUNIARY ORGANIZATION 147 

For instance, let anyone propose to himself the problem of sup- 
plying with daily provisions of all kinds a city containing above a 
million of inhabitants. Let him imagine himself intrusted with the 
office of furnishing to this enormous host their daily rations. Any 
considerable failure in the supply, even for a single day, might 
produce the m,ost frightful distress. Some of the articles consumed 
admit of being reserved ; but many, including most articles of animal 
food, and many of vegetable, are of the most perishable nature. A 
redundancy of supply would produce great waste. 

Moreover, in a district of such vast extent, it is essential that the 
supplies should be so distributed among the different quarters as to 
be brought almost to the doors of the inhabitants. Moreover, 
whereas the supply of provisions for an army is comparatively uni- 
form in kind, here the greatest possible variety is required, suitable 
to the wants of various classes of consumers. Again, this immense 
population is extremely fluctuating in numbers ; and the increase or 
diminution depends upon causes which cannot be distinctly foreseen. 

Lastly, and above all, the daily supplies of each article must be 
so nicely adjusted to the stock from which it is drawn — to the scanty, 
or miore or less abundant harvest, or other source of supply — to the 
interval which is to elapse before a fresh stock can be furnished, and 
to the probable abundance of the new supply, that as little distress as 
possible may be undergone ; that upon the one hand the population 
may not unnecessarily be put upon short allowance, and that on the 
other hand they may be preserved from the more dreadful risk of 
famine, which would ensue from their continuing a free consumption 
when the store was insufficient to hold out. 

Now let anyone consider this problem in all its bearings, reflect- 
ing upon the enormous and fluctuating number of persons to be fed ; 
the immense quantity and the variety of the provisions to be fur- 
nished ; the importance of a convenient distribution of them, and the 
necessity of husbanding them discreetly; and then let him reflect 
upon the anxious toil which such a task would impose on a board of 
the most experienced and intelligent commissaries ; who after all 
would be able to discharge their office but very inadequately. 

Yet this object is accomplished far better than it could be by any 
effort of human wisdom, through the agency of men, who think each 
of nothing beyond his immediate interest — and combine unconscious- 
ly to employ the wisest means for effecting an object, the vastness 
of which it would bewilder them even to contemplate. 

Early and long familiarity is apt to generate a stupid indifference 
to many objects, which, if new to us, would excite great admiration; 
and many are inclined to hold cheap a stranger who expresses won- 
der at what seemjs to us very natural and simple, merely because we 



148 CURRENT ECONOMIC PROBLEMS 

have been used to it. A New Zealander who was brought to Eng- 
land was struck with especial wonder, in his visit to London, at the 
mystery of how such an immense population could be fed, as he saw 
neither cattle nor crops. Many Londoners, who laughed at the 
savage's admiration, would probably have been found never to have 
thought of the mechanism which is here at work. 

It is really wonderful to consider with what ease and regularity 
this important end is accomplished, day after day, and year after 
year, through the sagacity and vigilance of private interest operating 
on the numerous class of wholesale and retail dealers. Each of these 
watches attentively the demands of his neighborhood, or of the mar- 
ket he frequents, for such commodities as he deals in. The appre- 
hension, on the one hand, of not realizing all the profit he might, 
and, on the other, of having his goods left on his hands, either by 
his laying in too large a stock, or by his rivals' underselling him — 
these, acting like antagonistic muscles, regulate the extent of his 
dealings, and the prices at which he buys and sells. An abundant 
supply causes him to lower his price, and thus enables the public to 
enjoy that abundance; while he is guided only by the apprehension 
of being undersold ; and, on the other hand, an actual or apprehended 
scarcity causes him to derriand a higher price. 

For doing this, corn-dealers in particular are often exposed to 
odium, as if they were the cause of the scarcity ; while in reality they 
are performing the important service of husbanding the supply in 
proportion to its deficiency. But the dealers deserve neither censure 
for the scarcity which they are ignorantly supposed to produce, nor 
credit for the important public service which they in reality perform. 
They are merely occupied in gaining a fair livelihood. And in the 
pursuit of this object, without any comprehensive wisdom, or any 
need of it, they co-operate, unknowingly, in conducting a system 
which, we may safely say, no human wisdom directed to that end 
could have conducted so well. 

B. PECUNIARY COMPETITION 

96. Economic Activity as a Struggle for Existence* 

BY ARTHUR I^'AIRBANKS 

The conditions of struggle are all but universal in society. Even 
writers who regard society as an organism point out a degree of 
competition between different functions and organs in the animal 
organism, and profess no surprise that with the less rigid structure 

^Adapted from Introduction to Sociology, 239-254 (1896). 



PECUNIARY ORGANIZATION 149 

of society, this comipetition becomes a far more important phase of 
all activity. 

It needs no second glance to- satisfy one that the economic activ- 
ity of society may fittingly be called a struggle. Follow some indus- 
trial product from the factory up to the time when it is consumed. 
The manufacturer of cotton igoods chooses between competing 
places for his factory ; the makers of his machinery are struggling 
with each other tO' produce most economically engines, looms, etc., 
that are best adapted to his work ; raw products he buys from sellers 
co'mpeting in the open market; labor he hires from: among men 
who bid against each other for his work ; transportation companies 
compete with one another in cheaply transferring his goods to mar- 
ket ; and, in the market, seller is struggling with seller for the priv- 
ilege of a sale with profit ; buyer and seller bargain together to agree 
on a price. The present century has seen barrier after barrier swept 
away, till the whole world enters more or less freely into the one 
struggle; family and social distinctions are being obliterated in the 
industrial world ; customs and laws in restraint of trade have been 
set aside. 

The result of this sudden expansion of the industrial struggle 
is to force more clearly on thinkers the fact that civilization moves, 
not away from struggle, but to new forms of struggle. And the 
efforts to deal with the many difficulties which have arisen from this 
sudden change make it clear that it is not by seeking to prevent 
struggle, but by modifying its forms, that progress will be made. 
Laborers who suffered in an unequal struggle have won their rights 
by combining and entering the struggle as a larger unit. Groups 
of cooperative buyers have united to do away with the petty compe- 
tition O'f the retail store, by elevating competition to a more reason- 
able plane. Nor are the greatest monopolies of the day altogether 
free from the higher forms of pressure in the economic struggle, 
uncontrolled as they may seem for a time. 

The change in the form of the struggle modifies the competing 
units. More in evidence just now is the struggle between groups 
determined by class lines than groups determined by territorial 
lines. With the passing oi the dominance oi individualism, the 
struggle, apparently, is between larger groups. The truth is that 
a simple struggle is being succeeded by a complex struggle between 
different kinds of units. The individual is freed from numerous 
restrictions that used to hamper him, but the competition in which 
he engages is limited in a new way. Not only does increasing dif- 
ferentiation effectively limit the number with whom he competes, 
but much of the burden of the struggle is shifted from the shouilders 



I50 CURRENT ECONOMIC PROBLEMS 

of the isolated individual to the group of which he is a member. 
Group competes with group, and the individual competes only with 
the other members of the group. The town removes many phases 
of the struggle for existence from each individual, the state removes 
many others; but within each political unit other ends call out the 
energy of the individual citizen. The manufacturer, in competing 
with other manufacturing groups, removes from his workmen much 
of the stress of economic struggle, but, within definite lines, the 
workman has only the more bitter a battle tO' fight. 

But no group organization has or can eliminate personal competi- 
tion between the members of a group. The actual outcome of the 
social process in which the fit tend to survive and multipfy depends 
largely upon the organization of a given society. With the removal 
of rigid barriers there has developed a more or less definite appara- 
tus for weeding out the unfit, and advancing those who are fit for 
better things. In the contest for industrial position, the laborer who 
can most economically perf O'rm a given task is the only one to whom 
an employer can afford to give the task. Each industrial crisis con- 
stitutes a severe test for everyone in the industrial world ; the less 
fit are thrown out of their place in the industrial world, wherever 
it may be. The so-called "out-of-work" class simply consists of 
those whose work cannot be utilized. During periods of industrial 
expansion, the mian of wisdom, skill, and vigor expects advance- 
ment, because new positions are being created for which these are 
the only recommendation. Always, everywhere, this contest for 
individual position is going on. 

70, Competition and Organization* 

BY CHARIvES H.COOIvEY 

It seems to me that the fundamental point always touched upon 
in questions of competition is the meaning of competition in rela- 
tion to organization. Now what is the meaning of competition in 
this regard ? I talce it to be simply an organizing process. The world 
is full of various agents. These agents in one way or another are 
continually getting displaced in the social structure, by the death of 
individuals, the decay of groups and systems, etc. Some method 
must be found of constantly building up the organization. If there 
is any other method of doing this than competition in the broad 
sense I do not know what it is. There must be some means of com- 

*Adapted from an article in the American Journal of Sociology, XIII, 
655-658 (1907). 



PECUNIARY ORGANIZATION 151 

paring and selecting the agents and adapting them to their work. 

Competition is not merely a cause of organization ; it is also an 
effect. As everywhere else in the interdependent social system, we 
find all influences interacting, each a cause of change in the other. 
Organization is a cause in that it furnishes motives and standards 
and methods of competition. These things are determined by cus- 
tom, by law, by public opinion, by the inherited ideas of men. 

Taking these points for granted, we come to^ the question, What 
is the matter with existing competition? I should say the matter is 
simply that existing competition shares in the prevailing disintegra- 
tion of social structures. We are all familiar with this disintegra- 
tion. It is chiefly, though not entirely, economic in its origin. The re- 
sult is that the standards, the methods of competition, today, are very 
far from being what the mast enlightened human nature would de- 
sire to have them. They are what is sometimes called "individual- 
istic" in the bad sense of the word. 

Perhaps I can best indicate this by taking an example. Let us 
suppose that there is a ship sailing on the seas, properly manned 
with officers and crew. Now, here is an organization. It may not 
be apparent at first that competition is going on in this little society ; 
but it is. If a mate does well, he may very likely get appointed cap- 
tain on the next cruise, or his wages may be raised. Or again the 
ship may be competing with another ship across the ocean and vari- 
ous advantages miay accrue if it succeeds. Here is well-ordered com- 
petition in which merit succeeds. That is to say, the test of success is 
something for the good of society, namely, the welfare of the ship 
and of commerce. But suppose that the ship quite unexpectedly in 
the dark runs upon an iceberg. The captain and the crew are 
thrown into the water. The society immediately and entirely dis- 
appears. The individuals are all struggling in the water, and a new 
kind of competition takes place. From the good of the ship and 
society, it falls back on the animal instinct for self-preservation. 
Man becomes a mere brute under these circumstances. The customs 
and modes of thought that keep society on a proper level are de- 
stroyed. 

Something analogous to this is widely prevalent in present 
society.. To pass on to the question as to how competition may be- 
come better: It is by building up the social organization through 
competition itself and raising the level of that competition by the 
ordinarv methods oi human endeavor. 



152 CURRENT ECONOMIC PROBLEMS 

71. The Beneficence of Competition^ 

BY CHARI^US K:INGSIvE;y 

Sweet competition ! Heavenly maid ! — ^Now-a-days hymned ahke 
by penny-a-liners and philosophers as the groinid of all society — 
the only real preserver of the earth! Why not of Heaven, too? 
Perhaps there is competition among the angels, and Gabriel and 
Raphael have won their ranks by doing the maximum of worship 
on the minimum of grace? We shall know some day. In the mean- 
time, ''these are thy works, thou parent of all good !" Man eating 
man, eaten by man, in every variety of degree and method! Why 
does not some enthusiastic political economist write an epic on "The 
Consecration of Cannibalism"? 

72. Competition and Selfishness'' 

BY S. J. CHAPMAN 

I must reiterate, in order that there may be nO' mistake, that 
modern analytical economics neither assumes nor advocates selfish- 
ness. But without relegating sentiment tO' Saturn, we may hold 
that the affections do not directly enter into most business transac- 
tions. "Oh 'tis love, 'tis love, that makes the world go round," 
asserted the duchess in Alice in Wonderland. "Somebody whis- 
pered," said Alice, "that it's done by everybody minding his own 
business." However, among the impulses which are the motive 
power of business activities, the affections may play a large part 
indirectly. A man may work his best to make as much as possible 
in the interests of his family or friends, or even for philanthropic 
purposes. Finally it must not be imagined that, in the absence of 
altruistic motives, a man who works his hardest for success must 
be sordid. The passion of great business leaders is commonly quite 
other than that of the miser. Because money provides the counters 
which measure commercial triumphs, we are apt to go astray in 
our analysis. They who play cards for cowries are not miastered 
by a passion for cowries. 

73. The Ethics of Competition^ 

BY J. A. HOBSON 

The consciousness of social service as a stimulus to work is not 
inconsistent with competition. The artist who labours to express 

^From "Cheap Clothes and Nasty," in Alton Locke, Ixviii-lxix (1850). 
®From Outlines of Political Economy, 17-18 (1911). 
''Adapted from The Industrial System, 307-308 (1909). 



PECUNIARY ORGANIZATION 153 

himself to others can only succeed on condition that he keeps before 
his mind these others : mere self-exipression is not art at all. Though, 
therefore, the artist may be working for g'ain, and may be conscious 
of his competitors, the interest in his work and his capacity to do it 
involves some regard for the public. The same applies also to the 
artisan so far as his manipulation of material involves conscious 
regard for its utility, and therefore consideration of the needs of 
the consumers. So, too, with the professions ; however keen the 
rivalry of professional men to get employment may be, the nature 
of the work they do involves the detailed operation of disinterested 
motives leading them to value their work for its real social utilit}' 
rather than for the gain it brings them,. This is the well-recog- 
nised difference between a profession and a trade, which has always 
underlain the lower esteem in which tradesmen and the trading 
spirit have been held. 

It is, indeed, in commerce, and primarily in retail trade, rather 
than in manufacture or any branch of production, that the ethics 
of competition appears to do most damage, the reason, of course, 
being that in the dealing processes antagonism of human interests is 
sharpest, and the conscious energy of dealers is most confined to the 
pursuit of personal profit. 

In most manufactures, though the employer is not in business 
"for his health," but primarily to make profits, the skill and intricacy 
of the practical operations which he conducts absorb much of his 
attention, and pride in the character of his business and the equality 
of its products dignifies his conduct. Just in proportion as he is not 
forced to concentrate his thought and feeling upon the art of getting 
business away from other firms and pushing his claims against theirs 
in the market, does his work take conscious shape in his mind as the 
social function which it really is. Just in proportion as the com- 
petitive activities assume prominence is he compelled to sink this 
social feeling, to push his goods in conscious rivalry with those of 
other firms, and to cultivate those arts of sweating, adulteration, and 
deceit, which seem necessary to enable him to sell goods at a profit. 

Such considerations indicate that the moral economy of compe- 
tition is not simple or uniform : where it takes shape in the rivalry 
of Euripides, Aeschylus and Sophocles to win the favour of an 
Athenian public for their respective dramas it may act as a direct 
incentive of the highest form of social wealth; where it operates 
among struggling grocers in the same street it may mean starved 
assistants, short weights and doctored goods. 



154 CURRENT ECONOMIC PROBLEMS 

74. State Determination of the Plane of Competitive Action* 

BY HE;NRY C. ADAMS 

What is meant by saying that unguarded competition tends to 
lower the moral sense of a business community? Wherever the 
personal element of a service comes prominently into view, and the 
character of the agent rather than the quality of goods is forced 
into prominence, probity has its market value and honesty may be 
the best policy. But in the commercial world as at present organ- 
ized, where the producer and the consumer seldom come into per- 
sonal contact, the moral arrangements followed in the process of 
production are not permitted a moment's thought. All that is con- 
sidered by the purchaser is the quality and the price of the goods. 
Those that are cheap he will buy, those that are dear he will reject; 
and in this manner he encourages those methods of production that 
lead to cheapness. 

There are O'f course exceptions to this rule. But these exceptions 
do not vitiate it. There must be substantial uniformity in the 
methods of all producers who continue in competition with each 
other. Each man in the business must adopt those rules of manage- 
ment which lead to low prices, or he will be compelled to quit the 
business. And if this cheapness, the essential requisite of business 
success, be the result of harsh and inhuman measures, or if it lead 
to misrepresentation and dishonesty on the part of salesmen or 
manufacturers, the inevitable result must be that harshness and 
inhumanity will becomfe the essential condition of success, and busi- 
ness men will be obliged to live a dual existence. 

The fact upon which we insist at this point is that an isolated 
man is powerless tO' stemi the tide of prevalent custom, and that in 
many lines of business those men whose moral sensibilities are the 
most blunted exercise an influence in determining prevalent cus- 
tom altogether out of proportion to their importance as industrial 
agents. Suppose that of ten manufacturers nine have a keen appre- 
ciation of the evils that flow from protracted labor on the part of 
women and children ; and, were it in their power, would gladly pro- 
duce cottons without destroying family life, and without setting in 
motion tho'se forces that must ultimately result in race-deterioration. 
But the tenth man has no such apprehensions. The claims of family 
life, the rights of childhood, and the maintenance of social well-be- 
ing, are but words to him. He measures success wholly by the rate 
of profit. If now the state stand as an unconcerned spectator, the 

^Adapted from The Relation of the State to Industrial Activity, 39-47 
(1887). 



PECUNIARY ORGANIZATION 155 

nine mien will be forced to^ conform to the methods adopted by the 
one. Their goods come into competition with his goods, and we 
who purchase dO' not inquire under what conditions they were man- 
ufactured. In this manner it is that men of the lowest character 
have it in their power to give the moral tone to the entire business 
community. One of the most common complaints of business men 
is that they are obliged to conform to rules of conduct which they 
despise. It is a necessary result of a competitive society that the 
plane of business morals is lower than the moral character of a 
great majority of men who compose it. 

But what, it may be asked, can the state do in the premises? 
The state has done much and can do more. That code of enact- 
ments known as "facto^ry legislation" is addressed to just this evil 
of competitive society, and it only remains for us to formulate for 
this code an economic defense. The general rule laid down for the 
guidance of state interference in industries was that society should 
be secured in the benefits while secured against the evils of competi- 
tive action. When the large body of competitors agree respecting 
some given method of procedure, but are powerless to follow it 
because a few men engaged in the same line of business refuse to 
conform to the proposed regulations, it becomes the province of the 
state to incorporate the wish of the majority in some practical law. 
In this manner there is established a legal plane of competition 
higher than that which could be maintained in the absence of legal 
enactment. This is no curtailment of competitive action, but a de- 
termination of the manner in which it shall take place. If the law 
says that no child shall be employed in factories, the plane of com- 
petition is raised to the grade of adult labor. If married women 
are refused employment, the nature of competition is again changed, 
but competition is not restricted. As the result of such legislation 
some of the evils of the present system would disappear, while all 
the benefits of individual action would yet be conserved to society. 

This, then, is one defense of interference on the part of the state. 
It lies within its proper functions to determine the character of 
such competitive action as shall take place. There must be con- 
formity of action between competitors, and the only question is 
whether the best or the worst men shall set the fashion. One can- 
not be neutral with regard to this question. No vote at all is a 
negative vote ; and a vote in the negative is as positive in its results 
as one in the affirmative. Should the state insist on following the 
rule of non-interference, society cannot hope to adjust its productive 
processes to the best possible form of organization. 



156 CURRENT ECONOMIC PROBLEMS 

We have all of us, doubtless, heard the claim that the state is a 
moral agency ; that it is imposed with moral duties. For a number 
of years after this phrase came to my notice, it presented to my 
mind no distinct meaning. It seemed to me to cover the philan- 
thropic purpose of shallov^ intellects, and to be most frequently 
used by men who knew not the way of guile nor anything else for 
certain. But properly understood this phrase contains a deep truth 
of social philosophy. It does not mean that the law is a schoolmas- 
ter coercing men to be good, nor that it is the deposito-ry of a social 
ideal to be admired ; but, on the contrary, it means that the law is an 
agency for the realization of the higher ideals of men by guarding 
them from that competition which would otherwise force them to a 
lower plane of action, or else force them out of business. In per- 
forming such a duty the state performs a moral function, for it reg- 
ulates competition to the demands of the social conscience. Under 
the guiding influence of such a thought the immediate interests of 
the individual may be made to coincide, in some degree, with the 
fundamental interests of society, and thus, by disregarding the dog- 
ma of laissez-faire, the fundamental purpose of those formulating 
the doctrine is in part realized. 

C. PRICE-FIXING BY AUTHORITY 

75. The Statute of Laborers^ 

Edward to the Reverend Father in Christ, William, Archbishop 
of Canterbury, Primate of all England, greeting. Because a great 
part of the people, and especially of workmen and servants, have 
lately died in the pestilence, many seeing the necessities of masters 
and great scarcity of servants, will not serve unless they may re- 
ceive excessive wages, and others preferring to beg in idleness rather 
than by labor to get their living; we, considering the grievous in- 
commodities which of the lack especially of ploughmen and such 
laborers may hereafter come, have upon deliberation with the pre- 
lates and the nobles and learned men assisting us, with their unani- 
mous counsel ordained: 

That every man and woman of our realm of England, of what 
condition he be, free or bond, able in body, and within the age of 
sixty years, not living in merchandising, nor exercising any craft, 
nor having of his own whereof he may live, nor land of his own 
about whose tillage he may occupy himself, and not serving any 
other; if he be required to serve in suitable service, his estate con- 
sidered, he shall be required to serve him which shall so require him ; 

"Adapted from Statutes of the Realm, 307-308 (about I349). 



PECUNIARY ORGANIZATION IS7 

and take only the wages, livery, meed, or salary wliich were accus- 
tomed to be given in the places where he oweth to serve, the twen- 
tieth year of our reign of England. Provided always that the lords 
be preferred before others so in their service to be retained ; so that, 
nevertheless, the said lords shall retain no more than necessary for 
them. And if any man or woman being so required to serve will not 
do the same, and that be proved, he shall immediately be taken to the 
next gaol, there to remain under straight keeping, till he find surety 
to serve. 

If any reaper, mower, other wiorkman or servant, retained in 
any man's service, do depart from the said service without reason- 
able cause or license, before the term agreed, he shall have pain of 
imprisonment; and no one, under the same penalty, shall presume 
to receive or retain such a one. 

No one, moreover, shall pay or promise to pay to anyone more 
wages than was accustomed ; nor shall anyone in any other manner 
demand or receive them, upon pain of doubling of that which shall 
have been so paid to him who thereof shall feel himself aggrieved; 
and if none such shall sue, then the same shall be applied to any 
one of the people that will sue. And if lords presume in any point 
to come against this present ordinance, then suit shall be made 
against them. And if any one before this present ordinance has 
covenanted with any so to serve for more wages, he shall not be 
bound to pay more than was wont ; nor, under the same penalty, shall 
he presume to pay more. 

Also, saddlers, skinners, white tawyers, cordwainers, tailors, 
smiths, carpenters, masons, tilers, shipwrights, carters, and all other 
artificers and workmen, shall not take for their labor and workman- 
ship above the same that was wont to be paid to such persons the 
said twentieth year. 

Also, that butchers, fishmongers, innkeepers, brewers, bakers, 
poulterers, and all other sellers of all manner of victuals be bound to 
sell the same victuals for a reasonable price, having respect to the 
price that such victuals are sold at in the places adjoining, so that 
the said sellers shall have moderate gains ; and if any sell the said 
victuals in any other manner, and thereof be convicted, he shall pay 
the double of the same that he so received to the party injured. 

And because that many strong beggars, as long as they may live 
by begging, do refuse to labor, giving themselves to idleness and 
vice, and sometimes to theft and other abominations ; none upon the 
said plan of imprisonment shall, under the color of pity or alms, give 
anything to such, so that thereby they may be compelled to labor for 
their necessary living. 



158 CURRENT ECONOMIC PROBLEMS 

76. Price-Fixing by Commission^" 

BY MARTIN IvUTHER 

The merchants have a common rule among them, it is their motto 
and the bottom of all their practices : I shall sell my wares as dear 
as I can. This I hold to be my right. But it means making room for 
greed and opening the door and window of hell. What else is this 
than saying : I will give no heed to my neighbor, if only I may have 
my profit and greed full ; what do I care if it brings my neighbor ten 
ills at once ? So you see how this motto goes so straight and shame- 
lessly against not only Christian love, but against natural law as 
well. What should there be in merchandising but sin where such a 
wrong is the motto and rule? By this token merchandising can be 
nothing else than stealing and plundering others of their own. 

For on this ground, when the rogue's eye and the greedy-gut 
mark that anyone must have their ware, they make their use and gain 
out of it. They look not at the worth of the ware, nor at the value 
of their service, nor their risk, but simply at the need and want of 
their neighbor — not to help him, but to use these for their own ad- 
vantage, and to put up their ware which they would leave at a low 
price if it were not for the necessity of their neighbor. And so 
through their greed the ware must have a price as much higher as 
the need of the neighbor is greater. Tell me, .is not thus the poor 
man's need sold to him with the ware? 

It should not be : I will sell my wares as dear as I can and please, 
but thus : I will sell my wares as dear as I should, or is right and 
proper. For thy selling should not be a work that is within thy 
power and will, without all law and limit, as though thou wert a god 
bounden to no one; but because thy selling is a work that thou 
performest to thy neighbor it should be restrained within such law 
and conscience that thou mayest practice it without harm and 
injury to thy neighbor. 

Asketh thou then : Well, how dear shall I sell it, then ? How 
shall I strike wfhat is right and just so that I may not overreach my 
neighbor ? Answer : That is indeed framed in no speech or writing ; 
no one hath yet undertaken to fix the price of every ware. The 
reason is this : Wares are not all alike ; one is brought farther than 
another, one takes more outlay than another, so that in this manner 
all is uncertain and must remain so, and nothing can be fixed, as 
little as one can fix one certain city whence they shall be brought, or 
a set outlay for all, since it may happen that one and the same ware, 

^"Adapted from the address on "Trade and Usury," in The Open Court, 
XI, 18-20. Translated by W. H. Carruth. Copyright (1524). 



PECUNIARY ORGANIZATION 159 

from one and the same city and brought on one and the same road, 
may cost more today than a year ago by reason of the road and the 
weather being worse, or some other chance that causes more outlay 
than at another time. But it is just that a merchant should gain so 
much on his wares that his outlay, his pains, and risk should be made 
good. Who can serve or work for nothing ? This saith the Gospel : 
"A laborer is worthy of his hire." 

But, not to pass over the matter in silence, the best and safest 
way would be that worldly authority should appoint and ordain in 
this matter sensible, honest people who might consider all wares and 
the outlay upon them and set accordingly the meet and limit of their 
value, so that the merchant might then add his service and get his 
decent living from it ; as indeed in some places the price of wine, fish, 
bread, and the like is set. But we Germans are too busy with drink- 
ing and dancing to give heed to such regulation. Since, therefore, 
such regulation is not to be hoped for, the next best counsel is that 
we value the wares as the comnton market gives and takes, or as the 
custom of the country is to give and take ; for in this as the saw holds 
good, "Do as others do, and thou'lt do no folly." 

77. The Futility of Price-Fixing" 

BY JOHN WITHERSPOON 

If you make a law that I shall be obliged to sell my grain, my 
cattle, or any commodity, at a certain price, you not only do what 
is unjust and impolitic, but with all respect be it said, you speak non- 
sense ; for I do not sell them at all : you take them from me. You 
are both buyer and seller and I am the sufferer only. 

I cannot help observing that laws of this kind have an inherent 
weakness in themselves ; they are not only unjust and unwise, but for 
the most part impracticable. They are an attempt to apply authority 
to that which is not its proper object, and to extend it beyond its 
natural bounds ; in both which we shall be sure to fail. The produc- 
tion of commodities must be the effect of industry, inclination, hope, 
and interest. The first of these is very imperfectly reached by au- 
thority, and the other three cannot be reached by it at all. Accord- 
ingly we found in this country, and every other society which ever 
tried such measures found, that they produced an effect directly 
contrary to what w'as expected from them. Instead of producing 

'■^Adapted from "An Essay on Money," in The Works of the Rev. John 
Witherspoon, IV, 224-226, 2d ed. (1802). 



i6o CURRENT ECONOMIC PROBLEMS 

moderation and plenty, they uniformly produced dearness and 
scarcity. It is worth while to observe that some of our legislatures 
saw so far into the matter as to perceive that they could not regulate 
the price of commodities, without regulating the price of the industry 
that produced them. Therefore they regulated the price of day 
laborers. This, however, though but one species of industry, was 
found to be wholly out of their pow'er. 

There are some instances mentioned at the time when these 
measures went into vogue, which superficial reasoners supposed to 
be examples of regulating laws attended with good effects. These 
were the regulation of the prices of chairs, hackney-coaches, and 
ticket-porters in cities, public ferries, and some others. But this was 
quite mistaking the nature of the thing. These instances have not 
the least connection with laws regulating prices in voluntary com- 
merce. In all these cases the persons who are employed solicit the 
privilege, obtain a license, and come under voluntary engagements 
to ask no higher price ; so that there is as complete a free contract as 
in buying and selling in open shops. I am so fully convinced of the 
truth and justice of the above principles that I think, were it proper 
at this time, I could show that even in the most enlightened nations 
of Europe there are still some laws subsisting which work in direct 
opposition to the intention of the makers. Of this kind in general 
are the laws against forestalling and regrating. They are now in- 
deed most of them asleep ; but so far as they are executed, they have 
the most powerful tendency to prevent, instead of promoting full 
and reasonable markets. As an example of our own skill in this 
branch a law was passed in Pennsylvania in time of the war pre- 
cisely upon this principle. It ordained that in all imported articles 
there should be but one step between the importer and consumer, and 
that therefore none of those who bought from the ship should be 
allowed to sell again. The makers of it considered that every hand 
through which a commodity passed must have a profit upon it, which 
would therefore greatly augment the cost to the consumer at last. 
But could anything in the world be more absurd? How could a 
family at one hundred miles distance from the seaboard be supplied 
with what they wanted? In' opposition to this principle it may be 
safely affirmed that the more merchants the cheaper goods, and that 
no carriage is so cheap, nor any distribution so equal or so plentiful 
as that which is made by those who have an interest in it and expect 
a profit from; it. 



PECUNIARY ORGANIZATION i6i 

D. THE FUNCTION OF MIDDLEMEN 
78. A Condemnation of Forestallers^^ 

Especially be it commanded on the part of our lord the king, that 
no forestaller be suffered to dwell in any town, — a man who is 
openly an oppressor of the poor, and the public enemy of the whole 
community and country; a man 'who, seeking his own evil gain, 
oppressing the poor and deceiving the rich, goes to meet corn, fish, 
herrings, or other articles for sale as they are being brought by 
land or water, carries them off, and contrives that they should be 
sold at a dearer rate. He deceives merchant strangers bringing 
merchandise by offering to sell their wares for them, and telling 
them that they might be dearer sold than the merchants expected; 
and so by craft and subtlety he deceives his town and his country. 
He that is convict thereof, the first time shall be amerced and lose 
the things so bought, and that according to the custom and ordi- 
nance of the toAvn ; he that is convict the second time shall have judg- 
ment of the pillory ; at the third time he shall be imprisoned and 
make fine; the fourth time he shall abjure the town. And this 
judgment shall be given upon all manner of forestallers, and like- 
wise upon those that have given them counsel, help, or favor. 

79. If Forestallers Had Their Deserts^^ 

BY GE:0RGE WASHINGTON 

It gives me great pleasure to find that there is likely to be a 
coalition of the Whigs in your State, and that the Assembly of it 
are so well disposed to second your endeavors in bringing those 
murderers of our cause, the monopolizers, forestallers, and engross- 
ers, to condign punishment. It is much to be lamented that each 
State long ere this has not hunted them down as the pests of society, 
and the greatest enemies we have to the happiness of America. I 
would to God, that one of the most atrocious in each State was hung 
in gibbets upon a gallows five times as high as the one prepared by 
Haman. No punishment, in my opinion, is too great for the man 
who can build his greatness upon the country's ruin. 

^"Adapted from Statutes of the Realm, I, 202 (about 1269). 

^^From a letter to Joseph Reed, dated December 12, 1778, in The Writings 
of George Washington, VII, 282. Edited by Worthington Chauncey Ford. 



1 62 CURRENT ECONOMIC PROBLEMS 

80. The Function of the Middleman^* 

BY HARTLEY WITHERS 

Anything that has been grown or made usually has to go a long 
way and pass through many hands before it comes into the possession 
of the man who finally eats it or wears it or otherwise consumes it. 
And every pair of hands through which it passes takes toll of it, that 
is to say, adds something to the price that the final consumer pays, 
or takes something ofif the profit that goes to the shareholders in the 
producing company, or off the wages that can be paid to the workers 
who made it. 

Most of these intermediaries are necessary. It is easy to talk of 
doing away with the middleman, but when he is done away with he 
usually comes to life again in another form or under another name. 
The most clearly necessary intermediary is the transporter. There 
is also at least one merchant, a broker or two, and the shopkeeper 
who finally makes the retail sale to the consumer. Furthermore 
there is another chain of people who are just as essential as the 
transporters — namely the bankers, financiers, and bill-brokers, who 
find the credit and provide the currency to finance the movement of 
the stuff from place to place, and see to. the consequent transfers of 
cash or credit. 

Now we begin to see the reason for the difference, so startling at 
first sight, between, for example, the coal that is sold at the pif- 
mouth for 10s. to 12s. a ton, and costs us in London anything up to 
30J. It occurs at once to all amateur economists that it would be an 
enormous saving if we could do away with all these middlemen and 
divide their gains between the producer, his workers, and the con- 
sumer. Why should not the consumer buy his coal at the pit-mouth ? 
So he could if he were there to arrange for its carriage, and, further, 
if he were prepared to buy a good round mouth-filling amount, not 
homeopathic doses of a ton or two at a time. Also he would only 
buy on the alluringly cheap terms one sees quoted in the papers if 
he contracted to take large quantities at regularly recurring inten^als, 
so that the colliery company could be sure of disposing of its output. 
Further, he would have to pay for the carriage of the coal, and by 
the time he had done so he would find that there was a very big hole 
in the saving he thought he was going to effect by dealing direct with 
the producer. 

Now, as the ordinary consumer could not possibly buy on the 
scale required unless he had a large amount of capital to sink in 

"Adapted from Poverty and Waste, 115-118. Published by E. P. Button 
& Co. (1914.) 



PECUNIARY ORGANIZATION 163 

coal and a large area of space in which to store it, and as he would 
also have to run the risk of its deterioration before he could use it, 
he would at once have brought home to him three services which are 
performed for him by middlemen, and would have to be performed 
by him or somebody, as soon as he did away with the middleman. 
These services are : ( i ) wholesale purchase and retail selling — the 
fact that the merchant is prepared to take away the coal in big blocks 
and store it and sell it piecemeal to suit our convenience; (2) the 
provision of capital to bridge the gap in time between purchase and 
sale; (3) the taking of the risks of deterioration in quality if the coal 
is not sold fast enough, and of a spell of warm weather which may 
knock a shilling or two off the price before it is sold. 

These services would have to be paid for even if we reorganized 
society on a socialistic basis. 

81. Middlemen in the Produce Trade 

BY EDWIN G. NOURSE' 

It is quite the fashion to impute to "middlemen" sole responsi- 
bility for the increases in prices which have recently occurred, and 
which together constitute what is usually referred to as "the high 
cost of living." In the words of the Massachusetts Commission on 
the Cost of Living, "A long line of commission men, produce mer- 
chants, jobbers, hucksters, retailers, and what-nots, simply passing 
goods from hand to hand like a bucket brigade at a fire, is not only 
inefficient and wasteful, but very costly. In these days a hydrant and 
a line of hose are wanted." 

This is undoubtedly a vivid statement of the case, but like most 
figures of speech, leaves something to be desired in the way of 
accurate analysis. It is certainly not more than a half-truth to 
speak of middlemen as "simply passing goods from hand to hand." 
The middleman performs four distinct functions, whose value to 
both producers and consumers should not be overlooked. 

In the first place, the middleman provides a market. He organ- 
izes the demand for all the various sorts of produce and brings it 
into effective touch with the producer, who is commonly in no posi- 
tion to find it for himself. The latter's farm or orchard is located 
with reference to advantages for production, and therefore far away 
from the markets in which he must sell his product. His abilities 
are too specialized in the direction of agricultural proficiency to give 
him the necessary commercial expertness. The time of harvesting 
the crop is generally the busiest season of the year, leaving the 
grower little time to devote to the intricate details of marketing his 



1 64 CURRENT ECONOMIC PROBLEMS 

product. Finally, there are comparatively few producers who have 
a sufficient volume of goods to enable them to ship in carload units, 
and yet they must move in such quantities, if they are to get to 
market at all. 

A kindred function is that of "equalization." Supplies, on the 
one hand, are more or less unreliable, fluctuating in quantity and 
quality according to the caprice of weather, pests, floods, and human 
nature; and demand, on the other hand, is no less arbitrary, spas- 
modic, and wayward. But if some central agency gathers these sup- 
plies together, classifies them into lots of appropriate size, and directs 
them into channels where demand is at the moment most keen, all 
parties are benefited. A large part of consumers' wants cannot be 
put in the form of definite orders some time ahead and only a small 
portion of supplies can be definitely promised in advance. Accord- 
ingly a clearing-house is needed, where current supplies can be offset 
against the day's demand. 

This consideration looks over into the second division, namely, 
the middleman's service to the consumer. To only a small extent 
is the modern consumer able to connect himself directly with sources 
of supply. He possesses neither the facilities nor the knowledge. 
His elaborate market-basket is filled from all over the world, from 
places he wots not of, and yet is replenished daily from stocks which 
have been brought within his daily reach. Commercial agencies of 
supply are scouring the world for better goods and constantly seek- 
ing better rneans of bringing them to the place of use and keeping 
them in the best condition until the time of use. 

Alongside of these commercial activities of the produce dealer is 
a third class of service which may be called "technical" — the actual 
handling of the goods, storage, repacking and regrading, culling, 
sorting, and fitting to meet needs or whims of the buying public. It 
is the oft-repeated comm!,ent of the dealers that most people buy, 
not according to reason, but according to their prejudices ; not to get 
nourishment, or flavor, or real excellence, but to please the eye. The 
extra labor and material thus necessarily piles up extra costs. 

Storage is partly a technical service, but it is charged for on a 
time basis and so comes also under the head of financing services. 
This fourth class of the middleman's services is of great importance 
and yet is entirely overlooked by those who regard him as engaged 
in merely passing goods from hand to hand. When the householder 
buys his apples or potatoes only as he needs them, and pays for them 
only at the end of the month, after they have been consumed, he 
should not forget that someone has financed that portion of his 
living expenses. But the dealer goes farther back and finances the 



PECUNIARY ORGANIZATION 165 

transportation and perhaps the growing of the crop. This service 
doubly benefits the producer, because without it producers would be 
crippled, supplies curtailed, and prices advanced. This is not to say- 
that producers may not in time arrange to finance their own opera- 
tions, but so long as the middleman is called upon to do it, he is 
undoubtedly performing a service, which should not be overlooked 
when we are balancing his account with the public. 

E. SPECULATION 
82. The Gamble of Life" 

BY JOHN W. GATES 

Life is a gamble. Everything is a gamble. When the farmer 
plants his corn he is gambling. He bets that the weather conditions 
will enable him to raise a good crop. Sometimes he loses, sometimes 
he wins. Every man who goes into business gambles. Of course 
the element of judgment enters in, but the element of chance cannot 
be ruled out. Whenever a man starts on a railroad journey, it's a 
gamble whether he ever reaches his destination. All life is a gamble, 
you see. 

83. The Twilight Zone" 

BY HARRY J. HOWLAND 

The Stock Exchange provides facilities which are used for three 
kinds of transactions — investment, speculation, and gambling. If 
the transactions on the floor belonged wholly to the first class, the 
Exchange would be unqualifiedly good. If they belonged wholly to 
the last class, it would be unqualifiedly bad. It is the middle term of 
this trio which falls on debatable ground. Investment needs no 
defense; no defense will save gambling from condemnation. But 
speculation is in a very different case from either. Speculation is a 
dog with a bad name. It is possible to gibbet it along with gambling 
and loose living. 

But is the verdict just? Is speculation an unsocial practice? Is 
the speculator, like the gambler, an enemy of society, a drone in the 
hive, contributing nothing to the general welfare? It is a convincing 
answer to this question that we seek. 

^^Quoted in Current Literature, LXI, 266 (igio?). 

"Adapted from "Speculation and Gambling," in The Independent, 
LXXVI, 15-17- Copyright (1913)- 



i66 CURRENT ECONOMIC PROBLEMS 

The three processes which go on upon the floor of the Stock 
Exchange — investment, speculation, and gambHng — are often inex- 
tricably mixed. It is often practically impossible to assign any par- 
ticular operation without question to one of these three classes. 

Iilvestment, for instance, is sometimes semi-speculative in char- 
acter. Here is a man who has saved a thousand dollars and wishes 
to lay it aside against a future need. There are many ways in which 
he may invest it on the Stock Exchange. He may buy government 
bonds with it. But in this case there is no chance that his principal 
will be increased to any degree when he comes to sell his bonds. 
This is pure investment. 

Or he may purchase a stock which, while it pays a good rate of 
dividend with regularity, is subject to fluctuations in price. Here he 
has a paying investment with the possibility of an increase in prin- 
cipal when he sells out. The stock may turn out, not only a good 
investment, but a good speculation. 

Or he may buy a stock which at present is paying no dividend at 
all, but which is selling at an extraordinarily low price. The value 
of the stock is all potential. The element of investment is totally 
absent from such a purchase. So investment and speculation are 
inextricably mixed in all kinds of operations on the Stock Exchange. 
In some, investment predominates; in some, speculation. In many 
the mixture is of nearly equal parts. 

Again, the line between speculation and gambling on the Stock 
Exchange is hazy and indistinct. There the twilight zone is broad 
and clouded. This is not because any of the operations on the Ex- 
change are in form or in essence gambling operations, as betting on 
a horse race or playing poker. The truth is that Stock Exchange 
speculation is not gambling, but it leads to many of the same evils 
to which gambling leads. This statement opens up highly debatable 
ground. Probably the most common view is that stock speculation 
might more properly be called stock gambling, that speculating on 
the price fluctuations of stocks is no different from gambling on the 
fall of cards or the gyrations of the roulette ball. But there are two 
essential differences, while at the same time there is one essential 
likeness. 

Speculation differs from gambling in process. In a gambling 
transaction if one party wins, the other party must lose. In specu- 
lative transactions it is no more necessary for one party to lose if 
the other party wins than it is in speculative purchase of land or 
potatoes or eggs. The transactions of the Stock Exchange are sales 
and purchases, bona fide, actual, complete. In each transaction each 
party to it gives what he wants less for what he wants more. The 



PECUNIARY ORGANIZATION 167 

judgment of either or both may be bad. But it is no less a real 
bargain, in which each side gets value received for what he gives. 
Gambling, on the contrary, does not involve an exchange of values. 
It is a contribution of values to a central fund, the ultimate owner- 
ship of the fund to be determined by chance. True, in gambling each 
contributor receives a chance of receiving all the contributions ; but 
he also runs a risk of losing his whole contribution. Thus the specu- 
lator receives a value in return for his stake, while the gambler does 
not. For the former it may not be the value that he thinks he is 
getting, and the value actually received may decline. But that is true 
of everybody who buys a commodity with a view to its increase in 
value, from raspberries to skyscrapers. The fact that a man's judg- 
ment as to future values may prove unsound does not throw him 
into the class of gamblers. 

Nor does the fact that speculation on the Stock Exchange is 
largely carried on through tradings on margins and short-selling 
make it gambling. Both processes are common under other names 
throughout the commercial world. Trading on margin is buying 
stock, and making only a small cash payment at the time of purchase. 
It differs in no essential particular from buying furniture on the 
instalment plan, from buying land on mortgage, and from buying 
books by subscription. It merely involves the use of personal credit 
backed by security. 

Short-selling is selling securities which one does not possess at 
the moment in the expectation and belief that they will go down in 
price. This action is no more gambling than that of an automobile 
manufacturer in contracting to sell an automobile before he has in 
his possession any of the materials out of which it is to be made is 
gambling. 

Speculation and gambling, again, differ widely in the service 
which they render to the community. Gambling renders none. The 
gambler is a drone in an economic hive, a parasite in the industrial 
organism. Speculation renders a real, a valuable, and indeed an 
indispensable service. The Stock Exchange brings the investor and 
the enterprise together. It directs capital into channels of invest- 
ment which the owners of the capital would never have been able 
to find for themselves. The speculator performs an important func- 
tion for the investor by forecasting the future. Speculation is the 
struggle of intelligence, armed with a knowledge of the ascertainable 
conditions, against the blind workings of chance. 

The essential likeness between gambling and speculation lies in 
the fact that both are attractive to those who have no business to 
indulge in them. Men will gamble who cannot afford to gamble, who 
have no skill at the game they seek to play. So, too, men will enter 



1 68 CURRENT ECONOMIC PROBLEMS 

into speculation lacking adequate resources, adequate knowledge, and 
adequate judgment. For just as gambling is attractive because it 
holds out glittering hopes of making money without labor, so specu- 
lation is attractive because the prizes for the successful are out of 
all proportion to the effort expended or to the stake put up. 

The main evil which accompanies speculation lies in this par- 
ticipation in it of the unfit. It is not speculation in itself that is an 
evil, but the improper and unwise use of the speculative faculties by 
the ignorant and the unskilled, the insufficiently provided, the weak 
in judgment. 

84. The Ethics o£ Speculation" 

What is speculation? And how does it differ from legitimate 
business ? A miller knows in the fall that next summer he will need a 
million bushels of wheat. He studies the wheat conditions through- 
out the world, forms the best judgment he can as to the probable 
supply and demand, and the prospective market price, then sends 
out an agent to contract with the farmers to give him next summer 
the wheat he will need at the price he is willing to pay. This is a 
legitimate business transaction, advantageous to both miller and 
farmer. The fact that the miller may miscalculate, and as a result 
make an unexpected profit or suffer an unexpected loss does not 
make the transaction a speculation. 

A broker, who has no mill and has no use for any wheat, makes a 
similar calculation; he sends out his agent, buys in the fall of the 
farmers at an agreed price to be paid on delivery the next summer, 
expecting to sell the wheat in turn to the millers. This may be a 
legitimate business transaction. It is advantageous to farmer and 
miller. And in modern complicated business the service of the 
broker is often indispensable. 

A speculator makes a somewhat similar investigation of probable 
demand and supply. He knows what the average crop for the last 
five years has been. He knows that there is an iscreasing demand 
for wheat as a food product all over the world. He gets together 
some cash and more credit, and plans to buy up the whole wheat 
supply in the United States ; if necessary, the whole wheat supply of 
America. If he can succeed in doing this, he will have a monopoly, 
and can indefinitely increase the price. This is not quite so impos- 
sible as it may seem at first sight. He does not have to buy all the 
wheat; if he owns most of it, he can trust the owners of the rest not 
greatly to undersell him, and thus can largely determine the market 

^''Adapted from an editorial in The Outlook, XCII, 14-16. Copyright 
(1909). 



PECUNIARY ORGANIZATION 169 

price. He does not have to maintain the highest price for any great 
length of time; he has only to keep up his price until the date at 
which he has agreed to sell, and can often sell part before that time 
at a price sufficient to guard himself against loss. He does not have 
to pay cash for his v^heat. He has only to contract to pay at a 
future day, and meantime, to raise money enough, called a margin, 
to save from loss the man of w^hom he is buying it, in case the price 
declines below the amount which he has agreed to pay for it. 

But the speculator is not alone. Others are associated with him 
in his endeavor to obtain control of the wheat in the United States. 
There are also speculators who believe that this attempt will fail; 
and who are leagued together to make it fail. The former, in the 
jargon of the market, are called bulls ; the latter are called bears. 
The bears agree to sell wheat on the first of May at a fixed price ; 
the bulls agree to buy the wheat at that price. The bulls attempt to 
make the market price on the first of May as high as possible; the 
bears attempt to make it as low as possible. But the bears have no 
wheat to sell and do not expect to have any; and the bulls do not 
want any wheat and do not expect to buy any. 

What actually happens is this : Mr. Bear agrees to sell, and Mr. 
Bull agrees to buy, a thousand bushels of wheat on the first of May 
at one dollar per bushel. But on the first of May the market price 
of wheat is $1.10 a bushel. Mr. Bear, therefore, would have to 
spend $1,100 to buy the thousand bushels of wheat which he had 
agreed to sell to Mr. Bull for $1,000. Instead of doing so, he pays 
Mr. Bull $100. If, on the other hand, the price of wheat has fallen 
to ninety cents per bushel, Mr. Bear can buy for $900 the wheat for 
which Mr. Bull has agreed to pay him $1,000. In that case Mr. Bull 
pays Mr. Bear $100. 

No wheat is actually bought and sold ; no wheat passes from one 
to the other. Under guise of the contract to buy and sell, these two 
men, Mr. Bull and Mr. Bear, have simply made a bet as to the price 
of wheat on the first of May. The amount of the bet to be paid 
depends upon the difference between the actual market price on the 
first of May and the stipulated dollar a bushel. 

If the reader asks. How can a bet between two dealers affect the 
price of wheat? The answer is, It cannot. But when hundreds of 
men are excitedly offering to buy wheat and other hundreds to sell 
wheat, and these offers to buy and sell include millions of bushels 
that have no existence, and the bets upon the price of wheat reach 
millions of dollars, the result is to create an artificial demand and an 
equally artificial supply, which determine the market price of such 
wheat as is stored in the warehouses. 



I70 CURRENT ECONOMIC PROBLEMS 

The transaction is of no benefit to anyone except the successful 
gambler. It does not benefit the farmers ; for they are interested in 
having a steady price for their wheat, not a fluctuating price, which 
promises a great gain today and a serious loss tomorrow, and com- 
pels them to stuHy the gambler's market if they would get a benefit 
of the prices, a study for which they have neither the time nor the 
facility. It does not benefit the millers, who might judge what the 
prices of next season's wheat will be, if it were dependent on supply 
and demand as regulated by natural causes, but cannot judge if it is 
made dependent on the tricks and chances of a great gambling opera- 
tion. 

Gambling with breadstufifs is a great deal worse than gambling with 
cards or dice; the gambling carried on on the Produce Exchange, 
than that carried on in the gambling hells of New York City or in the 
Casino at Monte Carlo. Private gambling injures only the gam- 
blers and those immediately connected with them, and it demoralizes 
the few hundreds of occasional onlookers. The private gambler gets 
the money of his fellow-gambler for nothing, and, if the game is 
honestly played, gives his fellow-gamblers in return a chance to get 
his own money for nothing. But the public gamblers play their game 
with the property of their wholly innocent fellow-citizens. They 
gamble with the wheat-fields of the farmer, the flour-barrels of the 
miller, the bread loaves of the baker and the housekeeper. There 
is not a reader of these lines in America but may have suffered some 
injury from the gamblers in the Chicago wheat-market; and the 
whole country looks on at the gigantic game, and hundreds of thou- 
sands of fascinated spectators are demoralized by the spectacle. 
These gamblers are not robbers, for they are not taking our property 
by violence, but they are taking it without our consent and without 
giving us any return for it. 

85. The Utility of Cotton Futures^^ 

BY ai^^rkd b. she:ppe;rson 

The opinion held by many that the transactions in "futures" are 
almost entirely for speculation is very erroneous. The buying and 
selling of cotton "futures" is absolutely essential to the successful 
prosecution of the business of cotton manufacturers and cotton 
dealers as at present conducted. 

^® Adapted from a pamphlet entitled An Exposition of the Methods of 
Business in Cotton Futures as Conducted in the New York, New Orleans, 
and Liverpool Markets. Published by Hubbard Brothers & Co., New York 
(1907). 



PECUNIARY ORGANIZATION 171 

Many cotton mills now sell their product of yarns and cloth for 
delivery many months in the future. To do this they must know the 
cost of cotton for months before it is manufactured. Unless the 
market for cotton "futures" avail, the only way to do this is to buy 
the actual cotton at the time the sale of yarns or cloth for future 
delivery is made. This would involve a large outlay of capital with 
the loss of interest on it, besides the expense of storage and insur- 
ance and loss of weight in the cotton. 

Under the present methods, the cotton manufacturer can safely 
sell the product of his mills for delivery far into the future by buying 
"futures" to the extent of the raw material required, and then pur- 
chase the actual cotton as it is needed for manufacturing, and selling 
out his "futures" as he buys cotton of the quality to meet his require- 
ments. If the price of cotton advances between the time of his pur- 
chase of "futures" and the date on which he buys the actual cotton, 
he will make a profit on the transaction in "futures" sufficient to 
make good the difference. If the price of cotton falls he will make 
enough on the actual cotton bought to cover the losses on his "fu- 
tures." Thus, but for the facilities offered for buying "futures" in 
the manner indicated, the cotton manufacturer, who possesses only 
moderate capital, would be unable to sell his product except for quick 
delivery, without taking great risks of loss by an advance in the price 
of the raw material. 



86. Hedging on the Wheat Market^^ 

BY ALBERT C. STEPHENS 

A Glasgow miller, in February, desires to purchase 100,000 bush- 
els of California wheat to grind into flour. The price has been tend- 
ing upward. He purchases this wheat, engages freight room, and 
arranges to have it shipped to Glasgow. The price and freight will 
make the wheat cost him in Glasgow about $1.07 per bushel. But 
the wheat will not arrive until September or October, five months 
away. By that time, following the Atlantic coast harvests, and with 
the then probable renewal of arrivals of Russian and Indian wheat, 
the Glasgow price rrtight or might not be lower than $1.07. In order 
to insure himself against loss, the Glasgow miller sells 100,000 
bushels of wheat for October delivery at New York. The California 
wheat arrives at Glasgow, but the price of wheat the world over has 
declined, and the miller finds that it has cost him two or three cents 

"Adapted from "Futures in the Wheat Market," in the Quarterly 
Journal of Economics, II, 47-Si (1887). 



172 CURRENT ECONOMIC PROBLEMS 

a bushel more than the then ruhng price. Under strictly old-fash- 
ioned methods, had he not sold 100,000 bushels of wheat at New 
York, he would find himself at a decided disadvantage in competi- 
tion with millers who had not anticipated their wants as he had. 
But he is not so placed. When he found the market a few cents 
lower, he cabled an order to New York to buy 100,000 bushels for 
October delivery. At the maturity of his New York speculative con- 
tracts, he finds a profit about equal to the loss on his California 
transaction. Thus, owing to his protective future contract, he stands 
no loss, despite the drop in the price of wheat. Had he found a 
profit on his California wheat when it arrived — that is, had the price 
advanced after the grain left San Francisco — he would have covered 
his New York sale at a corresponding loss, thus leaving him situated 
as before. In this way, English millers and importers of wheat, 
buying in the United States, Russia, or elsewhere, habitually protect 
such purchases from fluctuations in prices, while in transit, by selling 
futures against them at New York or Chicago, and later by covering 
their contracts. When we consider the aggregate of wheat purchases 
made in this country, and remtember that all of these sales are in 
time covered by corresponding purchases of wheat, and that in all 
cases these speculative sales and purchases call for the actual delivery 
of grain, we may gain some conception of the reasons why future- 
sales make so large a total. 

But these insuring or protecting sales and purchases are by no 
means confined to foreigners, who buy throughout the world and 
ship to Europe. One may also find ample illustration at home. A 
New York merchant buys 100,000 bushels of hard wheat at Duluth, 
and orders it shipped by vessel to Buffalo, to go thence to New York 
by canal. He does this, not because he wants th-e wheat for his own 
use, but because he believes that, in view of known or apparent 
market conditions, he will be able to sell the grain in New York at 
a profit. With a more primitive view, he would ship this grain, 
wait until it arrived, look for a purchaser, and, finding one, sell the 
wheat for the price current on the day of arrival — say, three weeks 
after he bought it. If at a profit, well and good ; but if the price had 
declined, he would sustain a heavy loss, owing to the size of the 
shipment. But, nowadays, the New York merchant sells 100,000 
bushels of spring wheat, September delivery, at Chicago, at the date 
of his Duluth purchase in August. When the wheat reaches Buffalo, 
the price has advanced, and the millers there want part of his con- 
signment. He sells them 25,000 bushels, and buys 25,000 bushels of 
spring wheat at Chicago, September delivery, to make good the 
original quantity purchased. By this time he has also sold at New 
York 100,000 bushels, September delivery, to an exporter, an^l 



PECUNIARY ORGANIZATION 173 

bought 100,000 bushels more at Chicago, relying on the 75,000 
bushels on its way and his ability to get 25,000 bushels more, before 
it is demanded, to keep his engagement. When the 75,000 bushels 
hard wheat reach New York, the price has declined fractionally ; and 
the owner is enabled, in consequence, to purchase 25,000 bushels at 
a slightly better price, relatively, than he paid in Duluth, selling 
25,000 coincidentally at Chicago for September delivery. He lost on 
his Duluth purchase and on the 25,000 and 100,000 bushel purchases 
at Chicago, and on the 25,000 bushel purchase at New York. But 
he made rather more than corresponding gains through his sale, spot 
delivery, of 25,000 bushels at Buffalo, including profits on his sales 
of 225,000 bushels for September delivery at Chicago and New 
York, so that he gains on sales of 250,000 bushels, and loses on the 
purchases of 250,000 bushels. The transaction, as a whole, is not 
very profitable; but millers at home and abroad get wheat at the 
lowest market price on the dates of purchase, and the merchant 
whose sagacity, energy, and foresight led him to make a purchase, 
even when price conditions were unfavorable, is able to protect 
himself from excessive loss, without depressing the price to the 
original holder, and without having an incentive unduly to advance 
the price to the consumer. 

87. The Ups and Downs of Securities-" 

BY FRANCIS W. HIRST 

In the first place the value of a security depends mainly upon a 
quality wibich a bale of cotton or a ton of coal does not possess. It 
is either actually or potentially interest-bearing. This quality is vis- 
ible in a bond with coupons attached. A bond like that bought by 
subscribers to a Prussian state loan will have attached to it quarterly 
or half-yearly coupons, which can be cashed in almost any great cen- 
tre of finance. If the government promises to redeem the bond at 
the end of a definite period at par, at its maturity the bond will be 
worth par. In the meantime it will rise and fall according to the 
conditions, first of German credit, secondly of the international rate 
of interest. But these tendencies may be wholly or in part' counter- 
acted by antagonistic movements of an international character, for 
instance, a great war which destroys a vast amount of capital and 
absorbs vast quantities of savings. But the Prussian bond is not 
likely to fluctuate much, and the limits of its fluctuations will be the 
more restricted the more nearly it approaches its maturity. Thus 

-"Adapted from The Stock Exchange, 199-210. Copyright by Henry Holt 
& Co. (1911). 



174 CURRENT ECONOMIC PROBLEMS 

the value of a security depends mainly upon ( i ) the rate of interest, 
(2) the safety of the principal, and (3) the likelihood of the princi- 
pal or the rate of interest either rising or falling. These are the 
main causes of a rise or fall in securities. 

But the business of the Stock Exchange operators is to endeavor 
to forecast and discount in advance the natural fluctuations of in- 
trinsic value. In the old days before the telegraph, fortunes were 
made by getting early information, or spreading false information 
of victories and defeats, which would enhance or depress the price 
of stocks. The first Rothschild laid the foundations of his immense 
fortune by getting early news of important events. Nowadays the 
principle is still the same, but the art of anticipation has been made 
much more doubtful and complicated. Telegraphs and telephones 
are open to all. What everybody reads in his morning p^per is of 
no particular use to anybody in a speculative sense. Besides, many 
foreign governments keep large funds in London and Paris for the 
express purpose of supporting the market. Hence in the market 
for Government bonds, big movements are rare. 

When we come to the prices of railroad and industrial stocks the 
causes of movement are much more difficult tO' detect, and the possi- 
bilities of making large profits by inside knowledge is much greater. 
The newspapers may be the conscious or unconscious tools of the 
manipulators. In new countries the banks are likely to be a working 
part of the speculative machinery. Thus in the United States those 
who use great fortunes in finance frequently have a controlling in- 
terest in a bank. What is called a "community of interest" may be 
established which will control important railroads and huge indus- 
trial corporations, as well as a number of banks and trust com- 
panies. The various ways in which such a community may manipu- 
late a susceptible market like Wall Street might be made the subject 
of a long and fascinating volume. 

Suppose that a powerful group wishes to create the appearance 
of a general trade depression in the United States. To do so is not 
at all impossible. The controlled railways may announce and even 
partially carry out a policy of reduced orders for rails, equipment, 
and repairs. They ma}'^ ostentatiously proclaim an addition to the 
number of idle cars. Well-disciplined combinations of steel and 
textile mills may declare a curtailment of production. Banks may 
suddenly become ultra-conservative; the open accounts and credits 
of small speculative customers may be closed. In this way a general 
feeling of despondency can be created. Stocks will fall, partly in 
consequence of the action of the banks, causing a compulsory liqui- 
dation of speculative accounts, partly through the voluntary action 



PECUNIARY ORGANIZATION 175 

of speculatoTS who think that trade, earnings, profits, and dividends 
are likely tO' decline. Thus a bear market is created. The syndi- 
cate can now employ huge funds tO' advantage in profitable pur- 
chases of those stocks and shares which fall most and are most 
responsive to ups and downs. Such a policy of course represents 
great difficulties and dangers. It miust be carried out very cautious- 
ly and very secretly, and very honorably as between the members. 
And if it is too successful it may create a slump, or a panic, in which 
the community of interests may itself be seriously involved. For 
these and other reasons American operators and manipulators do 
not frequently enter upon a concerted plan for colossal bear opera- 
tions. Such a scheme is unpopular. It ofifends public sentiment. 
A long bearish movement, accompanied by unemployment, reduced 
earnings, and economies in expenditure, produce all manner of un- 
pleasant consequences, economic, social, and political. In fact big 
men often boast that they never operate upon the short side, never 
play for a fall. 

Such a movement as that sketched above is comparatively rare, 
cautious, and temporary. Wall Street has of course to wait upon 
circumstances. Sometimes it is caught by the circumstances. But 
it must always try tO' adjust itself to economic and political condi- 
tions. A political assassination, a war, a movement against the 
trusts, unfavorable decisions in the courts, an unexpected downfall 
of the favourite political party, a catastrophe like the San Francisco 
earthquake^ — such events as these may produce an irresistible flood 
of liquidation against which the strongest combination of bankers 
and corporation mien will struggle in vain. In a general scramble 
produced by some unexpected event there is more likely to be a gen- 
eral loss than a general profit. For in the history of speculation the 
unexpected event is usually a calamity. 

Real prosperity is built up gradually. The Stock Exchange an- 
ticipates and exaggerates it, until the speculative fabric has been 
reared so high above the real foundation that a crash is seen to be 
inevitable. Generally speaking, because of superior knowledge, the 
insiders are able to unload at high levels, just as they have been able 
to load at low levels. So, by speculating in stocks of a national size 
and significance, the outside public loses more than it gains. It 
begins to buy when they are dear, and it begins to sell when they 
are cheap. 

For purposes of scientific analysis we may rest the theory of 
Stock Exchange quotations upon a distinction between prices and 
values. Prices are temporary ; values are intrinsic ; they move slow- 
ly. The price represents the momentary market value of a stock 



176 CURRENT ECONOMIC PROBLEMS 

or bond. The value is the real worth, a thing undefinable and im- 
possible to ascertain. If the real value were ascertainable and avail- 
able to the public then price and value would be identical, and in the 
case of gilt-edge securities, the two are as nearly as possible identi- 
cal. But intrinsic values themselves change like everything else in 
the wodd. They depend mainly upon (i) the rate of interest, (2) 
the margin of surplus earning power or revenue. 

Both stocks and bonds are also affected in their intrinsic value 
by the money market and the relationship of the supply of capital 
seeking investment to the demand for capital by new flotations. The 
intrinsic value of common stock depends also upon the actual effi- 
ciency of the corporation, the condition of its plant, the skill of its 
management, and the contentment, intelligence, and industry of its 
whole staff. 

O'f course all these changeful elements of intrinsic value enter 
into prices. But as prices sometimes fluctuate violently, it is obvious 
that they must also be affected by other causes. These may be 
summed up under two heads : ( i ) False rumors, which have got 
about either by design or through the carelessness or mistakes of 
newsmongers; and (2) Rigs, pools, combinations, and other techni- 
cal devises, by which the market is either flooded with, or made bare 
of, a particular stock or group of stocks. 

88. The Functions of Exchanges^^ 

BY CHARIvE;s a. conant 

The fundamental function of the exchanges is to give mobility 
to capital. Without them the stocks and bonds of the share com- 
pany could not be placed to advantage. No one would know what 
their value was on a given day, because the transactions in them 
would be private and unrecorded. The opportunities for fraud 
would be multiplied a hundred fold. The mobility for capital af- 
forded by the corporation would be meager and inadequate if the 
holder of its bonds and shares did not know that at any moment 
he could take them to the exchanges and sell them. The publicity 
prevailing in stock-exchange quotations gives the hodder of a security 
not only the direct benefit of publicity, but the opinion of the most 
competent financiers of Europe and America. If they were dealing 
with him privately, they might withhold the information. But the 

^^Adapted from Wall Street and the Country, 88-116. Copyright by the 
author (1904). 



PECUNIARY ORGANIZATION 177 

quoted price stands as a g'uide to even the most ignorant holder of 
securities. 

The second benefit is in affording a test of the utihty to the com- 
munity of the enterprises which soHcit the support of investors. The 
judgment of experts is there expressed, through the medium of 
price, on the utihty of the object dealt in. If an unprofitable rail- 
road is built in the wilderness of Manitoba, the investor does not 
have to hunt up information on the freight and passengers carried : 
he has only to look at the quotations 011 the New York Stock Ex- 
change to know at once the judgment of experts on it as a com- 
mercial venture. If the investor finds that the stocks of cotton- 
mills are declining, he makes up his mind that there are no further 
demands for cotton mills. If stocks are exceptionally high, he 
knows that the public demands more cotton mills, and that an in- 
vestment in them will prove profitable. All this information is put 
before the investor in a single table of figures. It would be prac- 
tically unattainable in any other form. Thus there is afforded to 
capital throughout the world an almost unfailing index of the course 
in which new production should be directed. 

Suppose for a moment that the stock markets of the world were 
closed, that it was no longer possible to learn what concerns were 
paying dividends, what their stocks were worth, bow industrial es- 
tablishments were faring. How would the average man determine 
how new capital should be invested. He would have no guide ex- 
cept the most isolated facts gathered here and there at great ex- 
pense and trouble. A great misdirection of capital and energy 
would result. The stock market is the great governor of values, — 
the guide which points the finger to where capital is needed and 
where it is not needed. 

The very sensitiveness of the stock market is one of its safe- 
guards. Again and again it is declared in the market reports that 
certain events have been discounted. As a consequence when the 
event actually happens, it results in no such great disturbance to 
values as was expected. Is it not better that this discounting of 
future possibilities should occur? Is it desirable that capital and 
production should march blindly tO' the edge of a precipice and then 
leap off, instead of descending a gradual decline? This discounting 
of the market enables the man who holds a given security to convert 
it into money without being ruined. It enables the p'rudent man to 
hold on to his securities and even to buy those of the frightened and 
more excited. 

Another important influence of the stock exchange is that which 
it exerts upon the money market. The possession by any country 



178 CURRENT ECONOMIC PROBLEMS 

of a large mass of salable securities affords a powerful guarantee 
against the effects of a severe money panic. If in New York there 
arises a sudden pressure for money, the banks call in loans and 
begin to husband their cash. If they hold large quantities of securi- 
ties salable on the London or Paris or Berlin market, a cable order 
will effect the sale of these in an hour, and the gold proceeds will 
soon be available. These securities prevent sudden contraction and 
expansion in the rate of loans. This influence of the stock market 
has much the effect of a buffer upon the impact of two solid bodies. 
Crises are prevented when they can be prevented, and when they 
cannot they are anticipated, and their force is broken. Securities 
are in many cases better than money. If a large shipment of money 
has to be made from New York to London, it is much more eco- 
nomical to ship securities of the same amount than to ship kegs of 
gold. Credit is forwarded by cable and the securities follow by 
mail. All markets are thus brought into touch with each other, and 
respond to a fluctuation of a fraction of one per cent, but without 
the confusion and crash which would ensue if every sudden pressure 
for money was felt upon a market naked of such securities. 

There is another important consideration in this influence of the 
stock market upon modem society, which will perhaps gather up 
and bring into a clearer light some of the other points which have 
been made. The stock market, by bringing all values to a level in 
a cO'mmon and public market, determines the direction of produc- 
tion in the only way in which it can be safely determined 
under the modern industrial system of production in anticipa- 
tion of demand. It does so by offering the highest price for money 
and for the earnings of money at the point where they are most 
needed. It is only through the money market and the stock ex- 
change together that any real clue is afforded of the need for capital, 
either territorially or in different industries. Capital is attracted to 
securities that are selling high because the industries they represent 
are earning well. Consequently there results a closer adjustment 
Oif production tO' consumption, of the world's work to the world's 
need, than would be possible under any other system. 

89. The Experience of Germany with Stock Exchanges^^ 

In 1892 a commission was appointed by the German government 
to investigate the methods of the Berlin Exchange. The regular 
business of the Exchange embraced both securities and commodi- 

^^Adaptcd from The Report of the Hughes' Committee (N. Y.) on Specu- 
lation in Securities and Commodities (1909). 



PECUNIARY ORGANIZATION 179 

ties; it was an open board where anybody by paying a small fee 
couild trade. The broker could make such charge as he pleased for 
his services. Margins were not always required. Under the cir- 
cumstances many undesirable elements entered the exchange. 

The commission was composed of governmental officials, mer- 
chants, bankers, manufacturers, professors of political economy, and 
journalists. Its report was completed in November, 1893. Al- 
though there had been a wide-spread popular demand that all short 
selling be prohibited, the commission reported that such a policy 
would be harmful to German trade and industry. They were will- 
ing, however, to prohibit speculation in industrial stocks. 

The Reichstag, however, rejected the recommendations of the 
commission, and in 1896 enacted a law much more drastic. The 
landowners, constituting the powerful agrarian party, contended 
that short-selling lowered the price of agricultural products, and 
demanded that contracts on the Exchange for the future delivery of 
wheat and floiur be prohibited. The Reichstag assented to this de- 
mand. It also prohibited trading on the Exchange in industrial and 
mining shares for future delivery. It enacted that every person de- 
siring to carry on speculative transactions be required to enter his 
name in a public register, and that speculative trades by persons not 
so registering be deemed gambling contracts and void. The object 
was to deter small speculators and to restrict speculation to men of 
character and capital. 

The results were quite different from the intention of the legis- 
lature. Men of character and capital declined to advertise them- 
selves as speculators. The small fry found no difficulty in evading 
the law. Foreign brokers flocked to Berlin and established agencies 
for the purchase and sale of foreign stocks. Seventy such offices 
were opened in Berlin within one year after the law was passed 
and did a flourishing business. German capital was thus transferred 
to foreign markets. The Berlin Exchange became insignificant and 
the financial standing of Germany as a whole was impaired. 

There was, however, even a more serious consequence of the 
new law. While bankers and brokers were required to register, 
their customers were not compelled to do so. Consequently the 
latter could speculate through different brokers on both sides of the 
market, pocketing their profits and welching on their losses as gam- 
bling contracts. Numerous cases of this kind arose, and in some 
the plea of wagering was entered by men who had previously borne 
a good reputation. 



i8o CURRENT ECONOMIC PROBLEMS 

Another consequience was to turn over to the large banks much 
of the business previously done by independent houses. Persons 
who desired to make speculative investments in home securities ap- 
plied directly to the banks, depositing with them satisfactory security 
for the purchases. As the German banks were largely promoters 
of new enterprises, they could sell the securities to their depositors 
and finance the enterprise with the deposits. This was a profitable 
and safe business in good times, but attended by danger in periods 
of stringency, since the claims of depositors were payable on de- 
mand. Here again the law worked grotesquely, since customers 
whose names were not on the public register could, if the specula- 
tion turned out badly, reclaim the collateral or cash they had depos- 
ited as security. 

The evil consequences of the law brought about its partial repeal 
in 1908. By a law then passed the government may, in its discre- 
tion, authorize speculative transactions in industrial and mining 
securities of companies capitalized at not less than $5,000,000 ; the 
Stock Exchange Register was abolished; all persons whose names 
were in the commercial directory were declared legally bound by 
contracts made by them on the Exchange. Other persons, while not 
legally bound by such contracts, could not reclaim deposits of cash 
or collateral security for speculative contracts, on the plea that the 
contract was illegal. 

Germany is now seeking to recover the legitimate business 
thrown away twelve years ago. It still prohibits short selling of 
grain and flour, although the effects of the prohibition have been 
quite different from those which its supporters anticipated. As 
there are no open markets for these products, and nO' continuous 
quotations, both 'buyers and sellers are at a disadvantage ; prices are 
more fluctuating than they were before the passage of the law 
against short-selling. 

F. THE CORPORATION 

90. The Nature of the Business Corporation^^ 

BY HARRISON S. SMAI,I,e;y 

Superficially considered, a corporation is an association of per- 
sons for the accomplishment of certain purposes. While non-com- 
mercial motives lead to the organization of corporations, most of 
them are formed with money-making ends in view. These last are 

"^Adapted from a textbook entitled The Corporation Problem, privately 
published (1912). 



PECUNIARY ORGANIZATION i8i 

called business corporations. Persons become members by acquiring 
one or more shares of stock, on which account they are called share- 
holders. 

A share of stock represents an interest in the business ; hence 
a stockholder is an entrepreneur. All the shares of stock repre- 
sent all the interests in the business; and thus if there are i,ooo 
shares of stock outstanding, one who owns loo shares has a one- 
tenth interest in the business. A nominal value, called the "par 
value" is assigned by the corporation to its stock. In most cases the 
par value of a share is $ioo, though many companies have chosen 
other sums. The total par value of all the stock does not necessarily 
equal the value of the corporation's property. 

All net earnings, treated as profits, are distributed among the 
stockholders pro rata, and are called dividends. 

The price of a share of stock depends largely upon the rate 
of dividends customarily paid on it. If six or seven per cent, per 
annum is paid, the price will be about par; if twenty per cent, can 
be paid each year, the price will be far above par. But numerous 
other factors, for instance, the general credit and standing of the 
company, the apparent future prospects oi industries of that type, 
the condition of the money market, the general business situation, 
all share in determining the price of the stock. 

In addition tO' a right to dividends, the shareholder is entitled 
to other privileges and advantages. If the business is closed out, 
he has a right to his proportionate share of the net assets. During 
its life he has a voice in the management of the enterprise. In ad- 
dition to electing the directors, the stockholders have a right to de- 
cide such questions of exceptional character as the issue of stocks 
and bonds, the amendment of the corporate charter, the dissolution 
of the business, etc. Aside from these few extraordinary matters, the 
stockholders are without power, for the affairs of the company 
are in the hands of the directors, who, once elected, may manage 
the business as they see fit. All that the stockholders can do if not 
satisfied is to wait until the next annual meeting and then replace 
the directors with others. 

In stockholders' meetings each stockholder has one vote for 
eadh share of stock held by him. In voting for directors he has 
as many votes per share as there are directors tO' be elected. Thus, if 
five directors are to be elected and he holds one hundred shares, 
he has five hundred votes. These he can distribute in any way he 
sees fit. He can cast all for one candidate, one hundred for each of 
five, or otherwise. This is called cumulative voting. He is privil- 
eged to vote by proxy. 



i82 CURRENT ECONOMIC PROBLEMS 

In a majority of corporations, most of the stockholders take 
no active part. The control of the corporation is highly autocratic 
rather than democratic in character. Many corporations have thous- 
ands of members. Yet almost always it is dominated by less than 
a dozen men, who may own only a minority of its stock. Few per- 
sons attend the annual meeting of the stockholders. Parties par- 
ticularly interested collect proxies of absent members. Thus it is 
relatively easy for a management to perpetuate its control and to 
carry out its policies. 

In many corporations the stock is of two^ classes, common and 
preferred. The leading difference is that dividends at a certain 
fixed rate must be paid on the preferred, before any can be declared 
on the common ; but usually there are also other differences. If the 
business is closed up, the preferred stockholders usually have a 
prior claim. Not infrequently there is a difference in voting rights. 
In some cases preferred stockholders cannot vote unless their divi- 
dends are in arrears. In other cases the preferred stockholders are 
entitled to elect a certain number of directors, and the common 
stockholders the rest. 

Cumulative preferred stock is stock upon which, in addition to 
current dividends, all arrears of dividends must be paid before any 
dividends can be declared on the common. 

A corporation usually puts out bonds. The bond does not 
represent an investment in the business ; it simply evidences a debt 
owed by the corporation to an outsider. A bond is, in effect, a 
formal promissory note, a promise to repay money with interest at a 
certain per cent. The bondholder is not an entrepreneur, but simply 
a capitalist. In consequence he has no vote in corporate affairs. 
Bonds are almost invariably secured by a mortgage upon a part 
or all of the corporate property. All the stocks and bonds of a cor- 
poration are known as its securities, and the sum of the par 
values of all the securities is called the "capitalization" of the cor- 
poration. 

If a corporation is unable to pay interest on its bonds, or is 
otherwise insolvent, the proper court will, on application, appoint a 
receiver, who, as a temporar}^ officer of the court, takes charge of the 
corporate property and business. In these days it is deemed inex- 
pedient to tenninate an established enterprise, except in rare cases, 
and the receiver continues the business and attempts to build it up. 

While the receiver is thus engaged, the security holders form 
one or more "reorganization committees," to put the corporation on 



PECUNIARY ORGANIZATION 183 

a sounder basis. They must raise money to pay off back debts. Gen- 
erally they must scale down the capitalization, so that the earning 
power will cover the bond interest and also a fair rate oi dividends. 
This means that existing security holders must allow a portion of 
their securities to be cancelled, and the struggle to see how much 
each class of security holders will sacrifice is often long and bitter. 
Preferred stockholders suffer more than bondholders, and common 
stockholders more than preferred. Sometimes the stockholders are 
wholly '"frozen out." 

A corporation can be formed only with the consent of the gov- 
ernment, and upon such conditions as the government may pre- 
scribe. The instrument, granted by the state, and specifying the 
terms and conditions upon which the corporation may engage in 
the business for which it is organized, is called the charter. In this 
country the legislative branch of the government has always exer- 
cised the function of creating corporations. According to "general 
laws," now universally in force, any group of persons, not less in 
number than a fixed minimum, can become a body corporate under 
the conditions laid down in the law. 

A few striking facts will show that in the eyes of the law the 
corporation is an entity distinct from the stockholders, having a legal 
status and legal rights and Habilities of its own. First, the corporate 
property belongs to the corporation itself, not to the members ; a 
change in membership does not disturb the title. Second, a corpora- 
tion's contract is not the undertaking of its members. Third, the 
transfer of shares by the members has no effect upon the life of the 
corporation. 

Lawyers and judges have regarded the corporation as an arti- 
ficial person. The trouble resulting from that concept has been 
evident in connection with the penal laws concerning corporations. 
We have attempted to punish the corporation for violations of law, 
when it is evident that in every offense the real actors are human 
beings. To inflict a fine on a corporation is to lay a burden on the 
whole body of stockholders. In reality a few men committed the 
offense. Such a method oi corporate punishment is, therefore, as 
unjust as it is ineffectual. Consequently there has arisen the say- 
ing "guilt is personal," and we are now beginning to attack the re- 
sponsible individuals themselves. 

The true view of the corporation would seem to be that it is an 
imaginary entity which serves the association of persons as a con- 
venient instrument through which they may conduct their business. 



1 84 CURRENT ECONOMIC PROBLEMS 

91. Corporate Distribution of Risk and Control"* 

BY W. H. IvYON 

The corporation makes possible a parceling'-out of the incidents 
of ownership in many combinations, an allotment of management, 
risk, and income in varying proportions. The line of apportionment 
becomes very flexible. 

The corporate form marks the line of division of management 
into administration and control. Shareholders possess control, but 
through directors delegate administration to officers. Varying rights 
given special classes of stock make a widely varying apportionment 
of income, control, and risk. Common stockholders accept a maxi- 
mum of risk in expectation of a maximum of income. They may 
share the incident of control equally or in varying proportions with 
other classes of stock. If two classes of stock enjoy exactly equal 
rights, except that one has preference as to income, they do not 
divide control, but risks, and the combination of control plus risk in 
one as compared with the combination of control plus risk in the 
other makes the ownership represented by one class entirely different 
from the ownership represented by the other. 

We may speak of these divisions and combinations of income, 
control, and risk, creating different kinds of ownership, as horizon- 
tal divisions. But there is another division of ownership, that repre- 
sented by the number of shares of stock or the number of bonds. 
It makes a division into amount of ownership rather than kind, into 
quantity rather than quality, a perpendicular division. 

Now these two kinds of division of ownership accomplish two 
very different results. The perpendicular division of amounts of 
ownership makes possible the fitting of every man's pocketbook or 
financial ability. The horizontal division into kinds of ownership 
results in an even more difficult fitting, that of his type or state of 
mind. For one man may be more or less willing to take a chance 
than another. The same man may be more willing at one time than 
another. He may be unwilling to take any risk without having some 
control. 

A corporation's stock regularly carries the largest share of pres- 
ent control and also regularly the largest share of risk. The stock 
may itself divide into two or more classes having obviously diver- 
gent interests, with the result that each class will exercise for differ- 
ent purposes the amount of control it possesses. If there is common 
stock and preferred stock with a limited dividend, the common share- 

^* Adapted from Capitalisation: A Book of Corporation Finance, 6-16. 
Copyright by the author. Published by Houghton, Mififlin & Co. (1912). 



PECUNIARY ORGANIZATION 185 

holders may throw their influence in favor of a more hazardous 
conduct of the enterprise with an expectation of greater profit 
accruing to them. Since the preferred stockholders get only lim- 
ited dividends, they will throw their influence in favor O'f a safer 
conduct of the business. Interests of both classes of stockholders 
might coincide. If the corporation should not earn enough to pay 
full dividends on preferred stock, the preferred stockholders might 
desire the more hazardous conduct of the business. If the amount 
of preferred and common were the same, and each had the same 
voting power, each class would enjoy control equally. In practice 
this might not lead to a dead-lock in policy, for one shareholder own- 
ing a large amount of common and a small amount of preferred 
might vote his preferred to favor his common. If the amount of 
common were twice as great as the amount of preferred, and a share 
of each class had the same voting rights, the quality of control 
would in a way differ just as truly as if the amounts oif each class 
were equal but a greater voting power were given the common 
than the preferred. In either case the common shareholder in a 
clash of interests would be more likely to have the corporation's 
policy incline to his advantage. 

A corpOTation having only one class O'f stock, and no other secu- 
rities, offers the simplest type. Such a security carries all the con- 
trol, all the income, and all the risk. It effects only a vertical divis- 
ion of ownership. This form is proper if a satisfactory division 
of income, management, and risk cannot be made. A mining com- 
pany especially cannot well divide the peculiar hazards of the enter- 
prise. Since any class of mining securities must retain so much 
risk, investors will not sacrifice anything of income or control. So 
it follows that nearly all mining corporations, including oil com- 
panies, have only one class of stock and no other securities. Coal- 
mining companies have issued bonds to some extent, but this busi- 
ness rests upon a more assured basis than mining for metals. Man- 
ufacturing companies frequently issue no securities but their com- 
mon stock. This is probably due to the fact that they are engaged 
in established kinds of business and follow the precedents set by 
the older partnerships. So far our financial ingenuity has directed 
itself for the most part to the comparatively new forms of business, 
railroads and other public-service corporations. With the coming 
of the big industrial concerns more complex forms O'f financing ap- 
pear, and will probably make their way generally into industrial 
corporations. Though a holding company may have only common 
stock, that fact does not necessarily imply simplicity, for the sub- 
sidiary companies may have complex capitalizations. 



i86 CURRENT ECONOMIC PROBLEMS 

92. The Management of the Corporation^^ 

BY WESLEY C. MITCHELL 

The classical economists assumed that there stood at the head of 
the typical business enterprise a capitalist-employer, who provided a 
large part of the capital invested, assumed the pecuniary risk, per- 
formed the work of superintendence, and pocketed the profits. 
Many enterprisers of this versatile type remain today; but the ex- 
traordinary growth in size and influence of the joint-stock company 
has given greater prominence to another form of business manage- 
ment. 

The large corporation, dominant in business today, is owned by 
a miscellaneous and shifting body of stockholders. The funds re- 
quired for fixed investment are provided in somie measure by these 
owners, but in larger part by bondholders, who may or may not own 
shares as well as bonds. The work of management is usually dis- 
associated from ownership and risk. The stockholders delegate the 
supervision of the corporation's affairs to the directors and they turn 
over the task of administration to a set of general officers. The 
latter are commonly paid fixed salaries. 

In such an organization it is difficult to find anyone who corre- 
sponds closely to the capitalist-employer. Neither the typical stock- 
holder, who votes by proxy, nor the typical director, who gives his 
attention to routine affairs, fills the bill. The general officers, re- 
munerated largely by salaries, and practicing among themselves an 
elaborate division of labor, have no such discretion and carry no 
such risk as the capitalist-employer. The latter has, in fine, been re- 
placed by a "management," which includes several active directors 
and high officials, and often certain financial advisers, legal counsel, 
and large stockholders who are neither directors nor officials. It 
is this group which decides what shall be done with the corporation's 
property. 

In other cases, however, a single enterpriser dominates the cor- 
poration, and wields full authority. The stockholders elect his can- 
didates, the directors defer to his judgment, the officials act as his 
agents. His position may be firmly intrenched by an ownership of 
a majority of the voting shares, or may rest upon personal influence 
over the owners of voting shares. In the "one-man" corporations 
the theoretical division of authority and function becomes a legal 
fiction. Practically the dominant head corresponds to the old cap- 
italist-employer, except for the fact that he furnishes a far smaller 

"^Adapted from Business Cycles, 32-34. Copyright by the author (1913). 
Published by the University of California Press. 



PECUNIARY ORGANIZATION 187 

proportion of the capital, carries a far smaller proportion of the 
pecuniary risk, and performs a far smaller proportion of the detailed 
labor of superintendence. These limitations do not restrict, but on 
the contrary enhance, his power, because they mean that the indi- 
vidual who "owns the control" can determine the use of a mass of 
property and labor vastly greater than his own means would permit. 

While the corporate form of organization has made a theoretical 
division of the leadership of business enterprises among several 
parties at interest, it has also made possible in practice a centraliza- 
tion of power. The great captains of finance and industry wield an 
authority swollen by the capital which their prestige attracts from 
thousands of investors, and often augmented still further by working 
alliances among themselves. Among the enterprisers of the whole 
country, this small coterie exercises an influence out of proportion 
not only to their numbers but also to their wealth. The men at the 
head of smaller enterprises, though legally free, find their field of 
initiative limited by the operations of these magnates. 

In large corporations the few individuals in control have an op- 
portunity to make money for themselves at the expense of the en- 
terprise itself, or at the expense of the other parties at interest. By 
giving lucrative contracts to construction or repair companies in 
which they are interested, by utilizing their advance information of 
the corporation's affairs for speculation in the price of its shares, 
by rigging its accounts for the same purpose, by making loans or 
granting rebates to other companies in which they are interested, 
it is possible for an inner ring to make profits out of wrecking the 
corporation. There are certainly instances enough to invalidate the 
easy assumption that every business enterprise is managed to make 
money for the whole body of its owners. 



93. The Ethics of Corporate Management^® 

BY he:nry roge;rs SEAGER 

It is probably within the truth tO' say that one-half O'f the business 
of the United States is now controlled by corporations and there is 
every indication that the proportion is increasing. This makes im- 
portant the recognition of certain drawbacks attaching tO' the cor- 
porate form of organization. Chief among these is the fact that 
responsibility for the management of corporations is diffused. In 
one-man businesses and partnerships the men who organize and 

""Adapted from Principles of Economics, 161-163. Copyright by Henry 
Holt & Co. (1913). 



1 88 CURRENT ECONOMIC PROBLEMS 

manage the enterprise are the ones most vitally interested in its suc- 
cess. In corporatioms the stockholders, who' usually furnish the 
capital required and have to bear the loss if things gO' wrong, in- 
trust their interests to the board of directors. The board of direc- 
tors in turn deputes the actual management of the business tO' a 
salaried president or manager who' may not, and often does not, 
have any further interest in the business than that his reputation 
depends upon the honesty and wisdom with which he manages it. 
The enterpriser function is thus divided in the corporation between 
three parties no one of whom has the same vital interest in the bus- 
iness that a single enterpriser or partner feels in businesses con- 
ducted under other plans. Moreover, few directors or managers 
have not, at times, private interests in conflict with the corporate 
interests they are supposed to promote. This diffusion of responsi- 
bility and interest causes corporate management to be often waste- 
ful and sometimes corrupt. The salaries are frequently higher than 
they need to be to secure the required grade of labor, appointments 
are often determined by personal rather than by business consider- 
ations, and inflated prices are sometimes paid for materials in conse- 
quence of the fact that particular directors are interested in their 
productioni. More common than these clear violations of trust are 
misrepresentations in regard to the affairs of the corporation in- 
tended tO' influence the stock market and tO' enable those interested 
to carry through deals for their own benefit. 

Another abuse is connected with the borrowing power of cor- 
porations. When this power is used to secure money by the sale of 
bonds the law gives to bondholders no voice in the management of 
the corporation so long as their interest is paid and the principal is 
not defaulted. The larger the proportion of the capital required 
for any enterprise that is secured through the sale of bonds, the 
smaller is the interest in the business of the stockholders, whO' nev- 
ertheless continue to control it. It has often happened in connec- 
tion with railway corporations in the United States that the entire 
capital has been secured by selling bonds and that the stock has 
represented merely a bonus paid to the promoters of the company. 
This is a situation fraught with danger, as American experience has 
abundantly proved. To give a fictitious value tO' their stock, pro- 
moters are only too apt to pay dividends out of earnings that should 
be expended for renewals and replacements. Before the corporation 
is reduced to bankruptcy they can usually sell their holdings to un- 
suspecting investors and retire, leaving to them the task of reor- 
ganizing the business. 



PECUNIARY ORGANIZATION 189 

A third set of evils has reference to the general or public inter- 
est in corporations. Individuals in their pursuit of gain are con- 
trolled by the moral standards of their business associates. Cor- 
porations have no moral standards. Their directors have shown 
themiselves willing to wink at practices on the part of the officials 
they appoint to which they would not themselves stoop. Corpora- 
tion officials, moreover, do not hesitate to do things in the name and 
under the cover of the corporations which they would be ashamed 
to perform openly for themselves. In the United States corpora- 
tions have been guilty of buying legislatures, bribing judges, enter- 
ing into agreements with political parties insuring them certain priv- 
ileges in return for campaign contributions, and in fact of every sin 
in the political calendar. It is largely owing to them that the tone 
not only of business, but of political morality, is so much below the 
standards of private life. 



94. The Corporation and Personal Efficiency" 

BY George; w. pe;rkins 

Perhaps the most useful achievement of the great corporation 
has been the saving of waste in its particular line of business. By 
assembling the best brains, the best genius, the best energy in a 
given line of trade, and co-ordinating these in work for a common 
end, great results have been attained in the prevention of waste, the 
utilizing of by-products, the economizing in the manufacture of the 
product, the expense of selling, and through better and more uni- 
form service. 

This same grouping of men has raised the standard of their 
efficiency. Nothing develops man like contact with other men. A 
dozen men working apart and for separate ends do not develop the 
facility, the ideas, the general effectiveness that will become the 
qualities of a dozen men working together in one cause. In such 
work emulation plays a useful part; it does all the good and none 
of the harmi that the old method of restrictive competition did; 
the old competition was wholly self-seeking and often ruinous, while 
the new rivalry, within the limits of the same organization, is con- 
structive and uplifting. Thus the great corporation has developed 
men of a higher order of business ability than ever appeared under 
the odd conditions ; and what a value this has for the coming" sren- 
eration ! 

^''Adapted from "The Modern Corporation," 5-8, an address delivered 
at Columbia University, February 7, igo8. 



190 CURRENT ECONOMIC PROBLEMS 

We have heard many warnings that because of the great cor- 
poration we have been robbing the oncoming generation of its op- 
portunities. Nothing is more absurd. The larger the corporation, 
the more certain is the office boy to reach ultimately a foremost 
place if he is made of the right stuff, if he keeps everlastingly at 
it, and if he is determined to become master of each position he 
occupies. 

In the earlier days, the individual in business, as a rule, left his 
business to his children. Whether or not they were competent 
did not determine the succession. But the giant corporation can- 
not act in this way. Its m^auagement must have efficiency; and 
nothing has been more noticeable in the management of corpor- 
ations in the last few years than that "influence," so-called, as an 
element in selecting men for responsible posts, has been rapidly on 
the wane. Everything is giving way and must give way to the one 
supreme test of fitness. 

And is it not poissible that the accumulating of large fortunes in 
the future may be curtailed to a large extent through the very- 
workings of these corporations? Are there not many advantages 
in having corporations in which there are a large number of po- 
sitions carrying with them very handsome annual salaries, in place 
of firms with comparatively few partners — the annual profits of 
each one of whom were often so large that they amassed fortunes 
in a few years ? A position carrying a salary so large as to represent 
the interest on a handsome fortune can be permanently filled only 
by a man oi real ability, so that in case a man who is occupying 
such a position dies, it must, in turn, be filled with another man of 
the same order — while the fortune might be and most likely would 
be passed on regardless of the heir's ability. Therefore, the more 
positions of responsibility, of trust and of honor, that carry large 
salaries, the more goals we have for young men whose equipment 
for life consists of integrity, health, ability and energy. 

Further, there is opportunity in the corporation for a man not 
possessed of extraordinary ability ; wages are unquestionably higher, 
and labor is more steadily employed; for, in a given line of trade, 
handled to a considerable extent by a corporation, there are prac- 
tically no failures ; while, under the old methods of bitter, relent- 
less warfare, failures were frequent, and failure meant paralysis 
for labor as well as for capital. 

The great corporation is increasing opportunities for labor; for 
it is unquestionably making business conditions sounder. It is mak- 
ing business steadier ; because firms inevitably change and dissolve, 
while a corporation may go on indefinitely ; because it is able to sur- 



PECUNIARY ORGANIZATION 191 

vey the field much better than could a large number of firmls and 
individuals and, therefore, vastly better able to measure the demand 
for its output and, if properly managed, to prevent the accumulation 
of large stocks of goods that are not needed — a condition which often 
arose under the old methods when many firms were in ruthless com- 
petition with one another in the same line of business, oftentimes 
producing serious financial difficulties for one and all. 

Broadly and generally speaking, the corporation as we know it 
today, as we see it working and feel its results, is in a formative 
state. In many cases actual and desperately serious situations 
caused it toi be put together hurriedly. In many cases serious mis- 
takes have been made in the forms of organization, in the methods 
of mianagement, and in the ends that have been sought. In some 
instances the necessity for corporations has grown faster than has 
the ability of men to manage them. Yes, mistakes have been many 
and serious. But the corporation is with us; it is a condition, not 
a theory, and there are but two courses open to us — to kill it or to 
keep it. 

95. The Function of the Corporation 

BY J. B. CANNING 

The function of the modern business corporation, as a form of 
business organization, is to increase the productivity of invested 
capital and to facilitate and stimulate saving. The peculiar ability 
of the corporation to perform this function is due to its unique com- 
bination of legal rights and privileges which allows : ( i ) indefinitely 
minute division of its certificates of ownership (stocks) and of its 
certificates of indebtedness (bonds) ; (2) limitation of liability of 
its members (stockholders) ; (3) the distribution of the risks of in- 
dustry, by means of issues of different classes of stocks and of bonds, 
among its members and creditors ; (4) the delegation by its mem- 
bers of the power to direct and administer its business policy to its 
responsible agents, the directors and officers ; and (5) an easy means 
for transferring ownership of its securities from one investor to 
another. None of these rights, by itself, is peculiar to the corpora- 
tion. Partnerships with limited liability and joint-stock companies 
possess them in part, but no other form possesses quite so advan- 
tageous a combination of them. 

To a saver investing his accuntulations of capital to secure an in- 
come, the value of a nominal income of given amount, rate of flow, 
and time of accrual, becomes greater as the possibility of loss is min- 
imized or limited and as the probability of gain is increased. In 



192 CURRENT ECONOMIC PROBLEMS 

general, the greatest loss possible to an investor in the stock of a 
corporation is limited to the sum paid for the issued, and fully paid, 
stock/^ For, unlike the condition found in the ordinary partnership, 
air of whose members are agents of the firm and each of whom is, 
therefore, unlimitedly liable for any and all obligations incurred in 
the course of the firm's business by any other merrtber, the corpora- 
tion is, itself, a legal person and its stockholders are not its agents 
nor are they bound to it by any legal obligation other than that of 
paying for the stock its full subscription value. To a stockholder, 
therefore, the ability and integrity of other stockholders is a matter 
of no concern save as they possess the right to vote for directors and, 
indirectly, for officers, both of whom are agents of the corporation. 
Since the latter are agents of the corporation and not of the stock- 
holders, they cannot incur obligations for which the stockholders are 
liable. 

The fact that a corporation may, and many do, issue bonds in 
convenient denominations, amply secured, as to their so-called prin- 
cipal, by tangible wealth and, as to their income, by net earnings con- 
siderably above the amount required, makes it possible for the small 
investor with little knowledge of the company's probable total earn- 
ing capacity to invest his savings in what is, humanly speaking, a 
certain income. The same corporation may issue another class of 
security, preferred stock, which generally has a first claim upon 
assets and upon incom/e after the claims of the bondholders are dis- 
charged. Upon these stocks a definite income, usually larger than 
that paid the bondholders, is promised — an income that may be, and 
often is, secured by net earnings considerably in excess of the amount 
necessary for the purpose. Purchase of this stock enables the in- 
vestor who has a more intimate knowledge of the company's affairs 
and prospects to secure a larger income without necessarily incur- 
ring greater risk. The ability of the corporation to issue still an- 
other class of security, common stock, which has a residual claim 
upon assets and upon income after all claims of the holders of bonds 
and of preferred stocks have been met, allows still another class of 
investors who have the most intimfate knowledge of the company's 
affairs, and who are most willing to incur risks, to secure an income 
objectively less certain but with no maximum limit other than the 
earning capacity of the company. The ability of the corporation 
thus to issue any number of classes of securities, each with a dif- 
ferent rank as to priority of claims upon assets and upon income, 

^^In some states stockholders are liable for twice the par value of the 
shares held. Holders of the stocks of national banks have a double liability. 



PECUNIARY ORGANIZATION 193 

allows for any relative distribution of risks and of rewards that 
promises to please the investing public best. 

In addition to the limitation of liability, which, in general, limits 
possible loss to the amount paid for an issued and fully paid stock, 
and in addition to the possibility of selecting from a given corpora- 
tion's securities one carrying little appreciable risk, the investor has 
another, and very important, means of reducing the risk of large 
loss, viz., he may distribute his investment among the securities of 
several corporations engaged in different kinds of enterprise and 
located in different parts of a country or in different countries. Since 
stocks may be issued in denominations as small as desired, and since 
a stock certificate represents an undivided interest in income and 
assets, it must be obvious that the total loss of an investment dis- 
tributed widely over the field of industry and apportioned judiciously 
among the existing industries and corporations can scarcely occur 
short of a catastrophe involving the general collapse of economic ac- 
tivities. Furthermore, the simple and direct means of transferring 
ownership of corporation securities miakes it easy for an investor, if 
he loses faith in a concern in whose securities he has invested, or if 
he learns of some other concern that promises better returns, to 
transfer his funds to another enterprise. Incidentally this ease of 
liquidation makes corporation securities highly acceptable as col- 
lateral for loans. Since the minimizing of risk increases the value 
of a prospective income, all these attributes of the corporation op- 
erate to offer the investor a larger reward for saving and, in conse- 
quence, tend to increase the amounts saved. 

The attributes of the corporation above discussed are econom- 
ically advantageous whether the scale of industry be large or small, 
but in the field of large-scale industry the corporation possesses a 
superiority of another sort. We have said that the investor may 
distribute his investment over a wide range; the converse of this 
statement is also true, viz., a new enterprise, however great, may 
draw funds in small amounts from a great number of investors. 
This makes it possible to gather together the smallest accumula- 
tions as fast as they are made and to put them to immediate use in 
those new enterprises that promise the greatest gains no matter how 
great those new enterprises may be. This result is usually accom- 
plished through the agency of savings banks, trust companies, in- 
surance companies, and other financial middlemen, who either advise 
the individual in his choice of securities or else make the investment 
m their own names from funds loaned them at interest by the saving 
public. As a consequence of this aptitude of the corporation for 
accumjulating large amounts from small savings, managerial ability. 



194 CURRENT ECONOMIC PROBLEMS 

mechanical labor, and machine processes may be so co-ordinated as 
to enhance to the greatest possible degree the productivity of the 
capital saved. 

The advantages of the corporation are readily seen, then, to be 
both interacting and cumulative. The productivity of capital is in- 
creased by the choice and co-ordination of productive factors ren- 
dered possible by large-scale industry. Accumulated capital is put to 
immediate use where it is most productive. The value of the in- 
creased income is enhanced by the limitation and distribution of 
risks. And all these work together to stimulate and to accelerate 
investment. 



V 

PROBLEMS OF THE BUSINESS CYCLE 

Under the simple conditions assumed in the last division, the problem 
of the organization of industrial life was found to present many bewilder- 
ing aspects. But. placed in a developing society it becomes doubly bewilder- 
ing. None of the economic and ethical questions which were noted have dis- 
appeared and the new setting adds its own quota of problems. 

The disturbing elements in the larger situation are closely associated with 
those regularly recurring phenomena which are usually called "crises" and 
"depressions." It was once held that these played havoc with "economic 
gear and cogs," throwing the "industrial machine" "out of joint," or leaving 
it "half stalled." Such conditions were looked upon as abnormal ; they were 
thought to create problems of a mechanical character ; they called for the 
services of the industrial mechanician. But, the damage once repaired, the 
"industrial machine" could run its prosperous course until another catastrophe 
threw "the monkey-wrench into the machine." 

Recent analysis, however, has shown that the matter is not so simple as 
all this. Two closely related lines of movement converge to produce these 
disturbances. The first is the development of the industrial system. This 
involves change in technique, in organization, in markets, and in the demand 
for goods. The instruments of production are largely specialized; labor is 
mobile only within fixed limits ; and only newly accumulated capital is pos- 
sessed of this characteristic. Capital values are based upon the earnings an- 
ticipated in view of the known and predictable, not the novel, elements in 
the situation. Particular productive goods are turned out with an expecta- 
tion that they will be used in the production of particular consumptive goods. 
The system as a whole has far too much of rigidity successfully and im- 
mediately to adapt itself to those radical changes. Yet so delicate is the 
system that anything which affects a particular industry is certain to have 
an appreciable effect upon the whole. 

The second is "the rhythm of business activity," or the economic cycle. 
A depression, characterized by conservatism in business and financial activity, 
gradually leads to an improvement in conditions ; as business expands a 
spirit of optimism arises, and stimulates further expansion ; the latter reacts 
upon the feeling of optimism and causes it to assume a tone of overconfidence, 
which leads to "flush times" and feverish activity ; sooner or later business 
overshoots the mark, losses occur, and perhaps a crisis, contraction is neces- 
sary, and a depression again appears. The cycle is a closed one; it has no 
logical begining and no consummation. From lean to fat to lean years it ever 
runs its varied round. 

But the situation is further complicated by the different behavior of dif- 
ferent industries and industrial agents during the cycle. If the price scheme 
were such that values as a whole could be quickly readjusted to meet new 
conditions, much trouble might be avoided. But such is not the case. Sheer 
necessity alone must be depended upon to establish the lower price level. But 
businesses occupy different strategic positions ; the baker and the manufac- 
turer of steel rails are likely to be affected in different ways by price-making 
forces at different stages of the cycle. The man with fixed salary and the 

195 



196 CURRENT ECONOMIC PROBLEMS 

employee whose contract runs in terms of a few months or weeks are on a 
different footing. The result is that all values do not go up or go down to- 
gether.. The output of various industries, similarly, do not increase or de- 
crease together. Yet all of these industries are involved in a delicate system 
that calls for nice adjustments. 

It is these movements which are responsible for the facts that no two 
cycles — or crises — are alike ; that the cycle varies greatly in length, in sweep, 
and in intensity, and that a myriad of dissimilar theories have been put for- 
ward to account for them, few of which contain no germ of truth. 

Its spectacular character has singled out the crises for particular atten- 
tion almost to the exclusion of the more important "flush times" and depres- 
sions. It is not surprising that antecedent business and industrial conditions 
are often overlooked, and crises are explained in terms of monetary 
standards and banking systems. Undoubtedly our banking laws in the past 
have made our crises unusually severe. The elasticity of credit and note- 
issue secured by the recent currency act should do much to relieve financial 
stringency when a crisis arises. It should also do something to prevent its 
occurrence. But those who expect it to cause the industrial process to pur- 
sue a more even course are likely to be disappointed. 

The violence of the ebb and flow of business activity increases tremend- 
ously the difficulty of properly organizing society through price. It also 
reveals grave breaks in the organization. Capital is insecure and funded 
wealth may disappear over night. The cycle is associated with a rhythm of 
overemployment, non-employment, and underemployment. The capitalists and 
laborers whose products satisfy marginal wants are put in a very precarious 
economic position. The crisis destroys wealth, specialized talent, and organi- 
zation, all of which must be replaced. 

The economic cycle involves the whole industrial system. No simple 
device will arrest the violence of its rhythm. It can be reached only by a 
complex of many complementary measures. // we are to control the cycle — ■ 
we must learn to control the introduction of new technique; the demand for 
goods must be steadied; we must develop an art of predicting business con- 
ditions ; a means must be found for co-ordinating recently accumulated cap- 
ital and opportunities for investment ; a higher sense of responsibility in mak- 
ing loans must be developed by the bankers ; a feeling of responsibility must 
be engendered in the promoter; and means must be devised for checking 
the speculative mania. 

In time, as our very rapid industrial development slows up, the sweep 
of the economic cycle may be expected to be less extreme. Then perhaps 
we shall hear complaints about a prosaic age that has no speculative prizes 
to dangle before the eyes of investors to tempt them to take chances with 
unknown opportunities. Then, perhaps, men will point to the "golden age" 
of the past, when unexploited opportunities were on all sides. They may 
go so far as to conclude that our violent fluctuations in business were a small 
price to pay for our i"apid industrial development. 

A. THE DELICATE MECHANISM OF INDUSTRY 
96. The Spirit of Business Enterprise^ 

BY WE;Sr.SY C. MlTCHE;r,I, 

Money economy has attained its fullest development in our own 
day under the influence of machine production. Its essential feature 

^Adapted from Business Cycles, 21-26. Copyright by the author (1913). 
Published by the University of California Press. 



TME BUSINESS CYCLE 197 

is that economic activity takes the form of making and spending 
money incomes. Instead of producing the goods their famiHes re- 
quire, men "make rr^oney," and with their money incomes buy for 
their own use goods made by unknown hands. The economic com- 
fort or misery of the modern family, accordingly, depends not upon 
its efficiency in making useful goods and its skill in husbanding sup- 
plies, but upon its ability to command an adequate money income 
and upon its pecuniary thrift. Even in years when crops are short 
and mills are idle, the family with money need not go cold or 
hungry. But the family without money leads a wretched life even 
in years of abundance. Always the elaborate co-operative process 
by which a nation's myriad workers provide for the meeting of each 
other's needs is brought into precarious dependence upon the factors 
which determine the prospects of making money. 

For purposes of making money men have gradually developed 
the modern business enterprise — an organization which seeks to 
realize pecuniary profits upon an investment of capital by a series 
of contracts for the purchase and sale of goods in terms of money. 
Business enterprises of the full-fledged type have come to occupy 
almost the whole field in finance, wholesale trade, railway and 
marine transportation. They dominate mining, lumbering and 
manufacturing. In retail trade they play an important role, and in 
agriculture they have secured a foothold. But, despite this wide 
extension of business aims and methods, there still remain broad 
differences of degree between the enterprises typical of the several 
fields of effort. In size, in complexity of organization, in dependence 
on the money market, in singleness of business aim, the typical farm 
and the small retail store are not comparable with the typical cor- 
porate enterprises of transportation, mining and finance. 

This uneven development of business organization in different 
fields is highly important. For it is within the circles of full-fledged 
business enterprises that the alternations of prosperity and depres- 
sion appear most clearly. Branches of trade which are not organized 
elaborately are much less susceptible both to the stimulus of pros- 
perity and to the inhibition of depression. In country districts, for 
example, the pace of activity is subject to seasonal but not to 
cyclical changes such as occur in factory towns. The farmers are 
never thrown out of work except by bad weather, and they are 
never overrushed except by seed-time and harvest. In other words, 
the scope and intensity of prosperity and depression appear to de- 
pend upon the extent and the perfection of business organization. 

No less important is the thoroughgoing interdependence of 
business enterprises. As a plant concerned with the handling of 



198 CURRENT ECONOMIC PROBLEMS 

commodities, the typical enterprise is one cog in a great machine. 
Our industries are carried on by sets of nominally independent 
plants which pass on goods to each other. For example, one series 
embraces wheat-growers, grain-carrying railways, elevators, flour 
mills, wholesale dealers in provisions, bakeries, and retail distribut- 
ing' agencies. Each set of members in such a series is dependent 
upon the preceding set for its chief supplies and upon the succeeding 
set for its chief vent. Further, no industrial series is self-sufflcing. 
Each set of enterprises in our example, from the farms to the retail 
agencies, is industrially dependent on other industrial series which 
equip it with buildings, machines, fuel, office supplies, etc. A peculiar 
mutual dependence exists between the whole mass of industries and 
the railways. Coal-mining and the steel trade also touch practically 
every industrial establishment. Since the transfers of goods are 
maintained by contracts of purchase and sale, each enterprise is af- 
fected by the fortunes of its customers, its competitors, and the 
purveyors of its supplies. Financial interdependence is also in part 
but another aspect of the industrial and commercial bonds. Compli- 
cated relationships of debtor and creditor arise from the purchase 
and sale of goods on credit, and make the disaster of one enterprise 
a menace to many. 

A business enterprise may participate in the work of providing 
the nation with useful goods or it may not. For there are divers 
ways of making money which are positively detrimental to future 
welfare. But it is more important that even the enterprises which 
are making useful goods do so only so far as the operation is ex- 
pected to serve the primary business end of miaking profits. Any 
other attitude is impracticable under the system of money economy. 
For the man who allowed his humanitarian interests to control his 
business policy would soon be forced out of business. From the 
business standpoint the useful goods produced are merely by- 
products of the process of earning dividends. A clear appreciation 
of this fact is necessary to an understanding of the relations between 
industry, commjerce, and business. For the well-being of the com- 
munity, efficient industry and commerce are vastly more important 
than successful rripney-making. A panic which did not interrupt 
the making and distributing of wares desired by the community 
would be no great disaster. But the whip-hand belongs to business. 
In practice, industry and commerce are thoroughly subordinated 
to it. The ebb and flow of contemporary economic activity is pri- 
marily concerned with the phenomena of business traffic — that is, 
of money-mlaking. 

Business prosperity depends upon the factors which control 
present and prospective profits, together with present and prospec- 



m 



THE BUSINESS CYCLE 199 

tive ability to meet financial obligations. Profits are made by con- 
nected series of purchases and sales. Accordingly the margins be- 
tween the prices at which goods can be bought and sold are the 
fundamental condition of business prosperity. Just as the ever- 
recurring changes within the system of prices affect business pros- 
perity and through it national welfare, so do changes in national 
welfare and business prosperity react upon prices. A period of 
business expansion causes an interminable series of readjustments 
in the prices of various goods. These readjustments in turn alter 
the pecuniary prospects of the business enterprisers which buy or 
sell the commodities affected, and thereby start new changes in 
business prosperity. With the latter changes the process begins 
anew. Prices once more undergo an uneven readjustment, pros- 
pects of profit become brighter or darker, business prosperity waxes 
or wanes, prices feel the reflex influence of the new business situa- 
tion — and so on without end. 



97. The Interdependence of Prices" 

BY wEsivEY c. mitche;liv 

The prices ruling at any given time for an infinite variety of 
commodities, services, and rights which are being bought and sold 
constitute a system. 

The prices which retail mlerchants charge for consumers' com- 
modities afford the best starting-point for a survey of this system. 
These prices are loosely connected with each other ; for an advance 
in the price of any commodity usually creates an increased demand 
for other commlodities which can be used as substitutes, and thus 
favors an advance in the price of the substitutes. They are, how- 
ever, more closely related to the prices for the same goods which 
shopkeepers pay to wholesale merchants, and the latter to manu- 
facturers. There is, of course, wide diversity between the number 
of members and in the margins between the successive prices in the 
series. These margins are usually wider in retail than in wholesale 
trade ; wider on perishable goods than on durable staples ; wider 
when the manufacturer sells directly to the consumer than when 
merchants intervene; wider when a monopolist can fix prices in his 
own favor, etc. But these diversities are themselves measurably 
regular, so that the margins between the successive prices in the 
series for each kind of commodities form a tolerable business basis 

^Adapted from Business Cycles, 27-32. Copyright by the author (1913)- 
Published by the University of California Press. 



200 CURRENT ECONOMIC PROBLEMS 

for making profits out of the process of supplying the community 
with goods. 

The business men engaged in squeezing money profits out of 
these price-margins are seldom able to keep the whole difference 
between buying aiid selling prices. From retailers to manufacturers 
they require various commodities, services, and rights for the effi- 
cient control of their operations. For such producers' goods they 
have to pay out prices which eat into the profit-margins of the goods 
in which they deal. The rrtost important classes of producers' goods 
are raw materials, buildings and machinery, labor, loans, leases, 
transportation, insurance, and advertising. It is difficult in many 
of these cases to connect directly the prices which figure as costs 
with the mjargins upon which particular commodities change hands. 
For the cost prices are usually paid for the pecuniary advantage of 
the enterprise as a whole, and the accruing benefits extend to many 
transactions and cover a long time. The like is true of manufac- 
turers. 

With the exception of labor, producers' goods are provided, like 
consumers' goods, by business enterprises operating on the basis 
of margins between buying and selling prices. Hence the price 
of a given goods is related not only to the prices of the consumers' 
goods in the production of which it is used, but also to the prices of 
the various other producers' goods employed in its own manufac- 
ture. Thus the prices of producers' goods form the beginnings of 
new series of relationships which run backward with countless 
ramifications and never reach definite stopping-points. Even the 
prices of raw materials in the hands of the ultimate producers are 
related intintately to the prices of the labor, current supplies, ma- 
chinery, buildings, land, loans, etc., which the farmers, miners, etc., 
employ. 

The price of labor may seem[ to bring the series to a definite stop 
at least at one point. For in most cases the laborer does not have 
a business attitude toward the production of his own energy. But 
the price which the laborer can command is connected with the 
prices of the consumers' goods which established habit has made 
into a standard of living. At this point, therefore, analysis of the 
interrelations between prices brings us, not to a full stop, but back 
to our starting-point, the prices of consumers' goods. 

We must also take account of the prices of business enterprises 
themselves. Occasionally established business enterprises are sold 
outright. But the most important transactions of this class are 
stock-exchange dealings. That the prices of whole business enter- 
prises or of shares in them are intimately related to the prices which 
have been discussed is clear ; for these prices depend primarily upon 



THE BUSINESS CYCLE 20 1 

present and prospective profits, and the latter upon price-margins 
and the volume of business transacted. 

There remains for consideration the prices paid for heteroge- 
neous personal services. These include domestic service, medical 
attendance, instruction, many forms of amusement, etc. The 
furnishing of such services contrasts with business traffic in con- 
sumers' goods, loans, transportation, etc. For systematic organiza- 
tion has not been developed to so high a point, business motives do 
not have such unrestricted scope, and the wares are not standardized 
in equal measure. Moreover, the prices people are willing to pay 
are based rather on personal needs and income than on calculated 
chances of profit. The prices of these services therefore form the 
most loosely organized and irregular division of the system of 
prices. 

This classification of prices assists in seeing the relations which 
bind all prices together and make them a system. Many price rela- 
tions are already sufficiently clear, but several lines of relationship 
should be indicated more definitely. 

1. On the side of demand almost every good has its possible 
substitutes. Through the continual shifting of demand changes in 
the price of one commodity are often communicated to the prices 
of its substitutes, from the latter to the prices of their substitutes, 
and so on. An initial change, however, usually becomes smaller as 
it spreads out in widening circles. 

2. Similarily, on the side of supply, almost every good has 
genetic relationships with other goods, made of the same materials, 
or supplied by the same set of enterprisers. Particularly important 
are the genetic relationships based upon the use of the same pro- 
ducers' goods in many lines of trade. Floating capital, transporta- 
tion, labor, machinery, etc., enter into the cost of most commodities. 
Accordingly a changed price established for one of these- common 
producers' goods in any important use may extend to a great diver- 
sity of other uses, and produce further price disturbances. 

- 3. Closely connected with this genetic relationship through com- 
mon producers' goods is the relationship through business compe- 
tition, both actual and potential. In so far as efl^ective competition 
exists, a state of price-margins which makes any one trade more or 
less profitable than other trades in the same market cannot long 
maintain itself. 

4. Present prices are affected by prices of the recent past and 
the anticipated prices of the near future. Indeed, present prices are 
largely determined by past bargains, with established time contracts. 
Thus the price system has no definable limits in timie. No analysis 



202 CURRENT ECONOMIC PROBLEMS 

can get back to the ultimate term in the endless series of bargains 
which helped to make the prices of the present. 

5. Nor has the series of prices any logical beginning or end. 
At whatever point analysis may start to follow the interlocking 
links, to that point analysis will come if it proceeds far enough. 
The system of prices is an endless chain. 

Prices, then form a highly complex system of many parts con- 
nected with each other in diverse ways, a system infinitely flexible 
in detail, yet stable in the essential balance of its interrelations, a 
system like a living organism in its ability to recover from the serious 
disorders into which it periodically falls. 

The most significant thing about it is the function it performs 
in the economic life of nations. It serves as a social mechanism 
for carrying on the processes of providing goods. For prices are 
the means which make possible the elaborate exchanges, and the 
consequent specialization which characterizes the modern world. 
They are the source from which family income is derived, and the 
means by which goods are obtained for family consumption ; for 
both income and cost of living — the two jaws of the vise in which 
the modern family is squeezed — are aggregates of prices. Prices 
also render possible the rational direction of economic activity by 
accounting, for accounting is based upon the principle of represent- 
ing all the heterogeneous commodities, services, and rights with 
which a business enterprise is concerned in terms of money price. 
Most important of all, the margins between different prices within 
the system hold out that hope of pecuniary profit which is the 
motive power that drives our business world. 

98. The Sensitive Mechanism of Credit^ 

BY HAROLD G. MOUIvTON 

It has become almost a trite saying that credit is the very life- 
blood of commerce and that without its wonderful assistance the 
enormous business of the modern world would be quite impossible. 
It is a commonplace, also, that the credit structure is a very uncer- 
tain mechanism, one that periodically expands to a breaking-point 
and involves hundreds of businesses in financial ruin, and indirectly 
demoralizes the commerce of an entire country. The precise manner 
in which this credit structure is built up, however, with its intricate 
and complicated interrelations, is not usually clearly understood. It 
is the purpose of the following analysis to trace these intricate 

'Adapted from an article with the foregoing caption in a volume as yet 
unpublished. 



THE BUSINESS CYCLE 203 

relations, and show the complicated interdependences in the fabric 
of commercial credit. 

Commerce relates to the movement of goods from the hands of 
those who perform the first operation in production to their final 
resting-place with the ultimate consumers. Corrimercial credit con- 
nects itself, therefore, with the various purchases and sales that 
are made in the slow process of marketing commodities. The nature 
and place of credit in the marketing process may perhaps best be 
made clear by assuming first a society that does business on a cash 
basis only. 

To illustrate the process let us begin with some raw materials 
in the form of iron ore and coal which are to be manufactured into 
farm machinery for sale to farmers. These raw materials normally 
pass through the hands of the following classes of business men : 
(i) the manufacturer of machinery; (2) the wholesale dealer; (3) 
the retail mierchant from whom they are purchased by the farmer. 
In the absence of credit the producer of raw materials would have 
to possess enough capital to defray the cost of producing these 
materials. He would sell them for cash to the manufacturer, who 
pays for them with ready money. In turn, the manufacturer, after 
having converted the materials into finished machines, sells them in 
a new form to the wholesale dealer, who pays for them out of funds 
accurnulated for the purpose. The wholesaler next passes them on 
to the retailer for cash ; and the retailer disposes of them to the 
farmer for cash. In each case cash accumulated and in hand ready 
for payment is the significant feature. We have thus far, however, 
but half completed the commercial circle. 

The farmer does not purchase the machinery as an end in itself. 
With it he produces crops for sale. He sells his annual produce 
to a local dealer for cash ; the local dealer sells these products to the 
commission merchant for cash; the commission merchant passes 
them on for cash to a retail store ; and the storekeeper sells them 
for cash to his customers, who happen to be, let us assume, the 
laborers in the mines of iron and coal who were the original pro- 
ducers of the raw materials that went to the making of farm ma- 
chinery. Thus we have the complete round of production. 

In the foregoing analysis we have assumed each sale to be for 
cash; no one waits for his payments, and all keep the slate clear 
as they go. With such a method there is little danger of a general 
breakdown. If a purchaser has not the cash with which to pay for 
goods, he is refused the sale. Hence the seller is never dependent 
upon the future solvency of his purchaser. Sales may be restricted 
by a slackening of the industrial process ; but there are never matur- 
ing obligations to meet, and there is never a chain of failures each 



204 CURRENT ECONOMIC PROBLEMS 

due to the previous one. Let us now introduce credit into the system 
as outhned above. 

It is evident that the farmer who buys the farm machinery is 
the ultimate demander of the raw materials purchased by the manu- 
facturer, and of course of the finished machines handled by the 
wholesaler and retailer respectively. In final analysis the farmer's 
cash pays for the labor of the workers in the mines of iron and 
coal. Or, traveling around the circuit in the opposite direction, 
it is the laborer's cash that really pays for crops of the farmer that 
have been produced by the farm m,achinery. Without credit, how- 
ever, it is impossible for the precise cash paid by the farmer to the 
retailer to be used by the latter in paying the wholesaler and so on 
up to the producer of the raw materials. In introducing credit into 
this system it will be necessary to assume for the moment a situa- 
tion that does not represent the actual state of affairs. The correc- 
tive will be given in the paragraph following. 

Let us assume that the producer of raw materials possesses 
enough to produce $10,000 worth of raw materials, paying his labor- 
ers in advance. Now let us assume he sells these materials to the 
manufacturer on twelve months' time, that is, he agrees to wait 
twelve months for his pay. The manufacturer in the course of three 
mionths converts these raw materials into finished machinery and 
sells the machines on nine months' time to the wholesaler. In a 
month the wholesaler disposes of the machinery, letting the retailer 
have eight months in which to pay. In another month the retailer 
sells the machines to a farmer, agreeing to wait seven months. Four 
months later the farmer sells his crops on three months' time to a 
local dealer, who sells them in a month to a commission merchant 
on two months' time; the commission merchant in turn selHng on 
one month's time to a retail store ; and the retailer disposes of them 
within a month to the laborers who work in the mines for cash 
received by them for producing raw materials. Cash would thus be 
paid to the retailer of farm produce just twelve months from the 
date of the first sale of the raw materials ; and if this cash should 
be passed on promptly through the hands of the commission mer- 
chant, local dealer, farmer, retailer, wholesaler and manufacturer 
to the original producer, it can liquidate all the obligations as per 
schedule. 

In actual practice, "however, twelve months would be a long time 
for the producer to wait for his payment. Similarly the periods of 
nine, eight and seven months would be too long for the others to 
wait; for further production would be more or less halted mean- 
while. In practice, therefore, credit extensions are for much shorter 
periods, usually from one to four mionths, whether it be the pro- 



THE BUSINESS CYCLE 205 

ducer of raw materials, the manufacturer, or the middlemen. How 
is this made possible? 

The manufacturer, for instance, may give his note to the pro- 
ducer for three months, and pay as soon as he sells to the whole- 
saler. The question now is, where does the wholesaler get the 
funds with which to pay ; does he not have to wait until the retailer 
has disposed of the goods? This is where the banks come to the 
assistance of commjerce. The wholesaler sells to the retailer on 
time, but instead of delaying his payment to the manufacturer, he 
procures a loan from his bank, giving as security therefor the notes 
received from the retailer. With this loan the wholesaler may pay 
the rnanufacturer at once. The loan from the bank is repaid when 
the retailer settles with the wholesaler. The bank therefore under- 
takes the waiting instead of the dealer. 

In the foregoing illustration it was the wholesaler who procured 
the loan from the bank. It may in fact, however, be any one or 
several in the chain of buyers and sellers. The manufacturer, for 
instance, instead of asking the wholesaler to pay cash could accept 
a promissory note, and then sell this note to a bank for cash, that 
is, have it discounted. Or the retailer might borrow from a bank 
and pay cash to the wholesaler. Similarly, on the other side of the 
circle, the commission merchant may pay cash to the local dealer, 
borrowing from a bank for the purpose; and the retailer of the 
foodstuffs may sell to his customers on credit, and borrow from a 
bank while waiting for his returns. It is quite immaterial which 
party procures the assistance of the banks; though in practice it 
usually becomes the custom for only certain ones in the chain to do 
so. In this country it is usually the manufacturers and the commis- 
sion merchants who pay cash. 

The commercial structure which we have thus outlined is seen 
to be very closely interrelated ; and it is because of this interde- 
pendence of factors that a "credit breakdown" has such far-reaching 
consequences. The credit circle cannot be disrupted at any point 
without more or less seriously disrupting the entire system. Sup- 
pose, for instance, that a long drouth or heavy rains ruin the agri- 
cultural produce and render it impossible for the farmer to pay 
the retailer as promiised. This affects the retailer's ability to pay 
the wholesaler, and in turn the wholesaler's ability to pay the manu- 
facturer, or his bank, and so on around the entire circle. Or sup- 
pose a strike in the manufacturing establishment should prevent the 
manufacturer from filling his selling orders. It becomes impossible 
for him to pay the producer on time ; and the latter in turn becomes 
unable to meet his obligations as they become due. The halting of 
the manufacturing process may compel the producer to restrict his 



2o6 CURRENT ECONOMIC PROBLEMS 

output of raw materials, and hence discharge laborers. This affects 
the sales of the retailer of the farm produce, and hence his ability 
to pay the commission merchant, and so on around the circle. 
Numerous other exam(ples of this sort might obviously be given. 

Whenever there is a break in the delicate structure at any point, 
there is always an attempt to stop the gap by calling upon the banks 
for assistance. Whoever finds himself unable to pay on time rushes 
to his banker for a loan. Indeed if there is but a well-grounded fear 
that difficulties are likely to come, dealers often go at once to the 
banks for loans in anticipation of trouble to come. Without going 
into an analysis of the responsibility thus placed upon the banking 
institutions, it should be emphasized that the success with which a 
community may pass through a period of disrupted credit operations 
depends upon the ability of the banks to expand their own credit 
sufficiently to tide the commercial world over the emergency. 

99. The "Planlessness" o£ Production* 

BY WESIvEY C. MiTCHELIv 

With technical experts to guide the making of goods, business 
experts to guide the making of money, lenders to review all plans 
requiring large investments, and government to care for the public 
welfare, it may seem that the money economy provides a staff and 
a procedure adequate to the task of directing economic activity, vast 
and difficult though that task may be. This impression is strength- 
ened by observing that each class of business leaders is spurred to 
efficiency and deterred from recklessness by danger of pecuniary 
loss. The engineer who blunders is discharged, the enterpriser who 
blunders goes into bankruptcy, the lender who blunders loses his 
money. Thus the guides who misdirect the industrial army are 
always being eliminated. On the other hand, those who succeed are 
constantly being promoted to posts of wider power. 

With this powerful stimulus of individual efficiency, the money 
economy unites an opportunity for co-operation on a grand scale. 
By paying money prices, the leaders can enlist the aid of laborers 
who contribute work of all kinds, of expert advisers who contribute 
special knowledge, of landlords who contribute the uses of their 
property, and of investors who contribute the uses of their funds. 
And all these classes can be made to work in disciplined order 
toward the execution of a single plan. 

The union between encouragement of individual efficiency and 
opportunity for wide co-operation is the great merit of the money 

^Adapted from Business Cycles, 37-40. Copyright by the author (1913). 
Published by the University of California Press. 



THE BUSINESS CYCLE 207 

economy. It provides a basis for what is unquestionably the best 
system for directing economic activity which men have yet practiced. 
Nevertheless, the system has serious limitations. 

I. The money economy provides for effective co-ordination of 
effort within each business enterprise, but not for effective co-ordi- 
nation of effort among- independent enterprises. 

The two schemes differ in almost all respects. Co-ordination 
within the enterprise is the result of careful planning by experts ; 
co-ordination among independent enterprises cannot be said to be 
planned at all ; rather is it the unplanned result of natural selection 
in a struggle for business survival. Co-ordination within an enter- 
prise has a definite end — the making of profits ; co-ordination 
ampng independent enterprises has no definite end, aside from the 
conflicting aims of the several units. Co-ordination within an enter- 
prise is maintained by a single authority possessed of power to carry 
its plans into effect ; co-ordination among independent enterprises 
depends upon many different authorities contending with each other, 
and without power to enforce a common program except so far as 
one can persuade or coerce others. As a result of these conditions 
co-ordination within an enterprise is characterized by economy of 
effort; co-ordination among independent enterprises by waste. 

In detail, then, economic activity is planned and directed with 
skill ; but in the large there is neither general plan nor general direc- 
tion. The charge that "capitalistic production is planless" therefore 
contains both an important element of truth and a large element of 
error. Civilized nations have not yet developed sufficient intelligence 
to make systematic plans for the sustenance of their populations ; 
they continue to rely upon the badly co-ordinated efforts of private 
initiative. Marked progress has been made, however, in the skill 
with which the latter efforts are directed. 

2. But the managerial skill of business enterprises is devoted 
to money-making. If the test of efficiency in the direction of 
economic activity be that of determining what needs are most im- 
portant for the common welfare and then satisfying them in the 
mjost economical manner, the present system is subject to a further 
criticism. For, in nations where a few have incomes sufficient to 
gratify trifling whims and where many cannot buy things necessary 
to maintain their own efficiency, it can hardly be argued that the 
goods which pay best are most needed. It is no fault of business 
leaders that they take prospective profits as their guide. They are 
compelled to do so; for the men who mix too much philanthropy 
with business soon cease to be leaders. But a system of economic 
organization which forces men to accept so artificial an aim as 



2o8 CURRENT ECONOMIC PROBLEMS 

pecuniary profit cannot guide their efforts with certainty toward 
their own ideals of pubHc welfare. 

3. Even from the point of view of business, prospective profit 
is an uncertain flickering light. Profits depend upon two variables, 
on margins between selling and buying prices, and on the volume of 
trade. These are related to each other in unstable fashion and each 
subject to perturbations from a multitude of unpredictable causes. 
That the system of prices has its own order is clear; but it is not 
less clear that the order fails to afford certainty of business success. 
Men of long experience and proved sagacity often find their calcula- 
tions upset by conjunctures which they could not anticipate. Thus 
the money economy confuses the guidance of economic activity by 
interjecting a large element of chance into every business venture. 

4. The hazards to be assumed grow greater with the extent of 
the market and with the time that elapses between the initiation and 
the fruition of an enterprise. But the progress of industrial tech- 
nique is steadily widening m|arkets, and requiring heavier invest- 
ments of capital for future production. Hence the share in eco- 
nomic leadership that falls to lenders, that of receiving the various 
chances offered them for investment, presents increasing difficulties. 
And a large proportion of these investors, particularly the lenders 
on long time, lack the capacity and the training for the successful 
performance of such work. 

These defects in the system of guiding economic activity and 
the bewildering complexity of the task itself allow the processes of 
economic life to fall into those recurrent disorders which constitute 
crises and depressions. 

B. THE ECONOMIC CYCLE 
100. The Periodicity of Commercial Crises^ 

BY J. S. NICHOIvSON 

Attention has often been called to the periodicity of crisis. After 
the occurrence of a crisis, there is, in general, a period of depression 
with restricted confidence and want of enterprise. That the de- 
pression is real, in the sense of affecting the producing and consum- 
ing powers of the people, is shown by varioiis kinds of statistics. 
There is, in general, a falling off in the employment of labor and 
an increase in pauperism; as regards capital, falling profits are 
shown by the income tax returns, and the contraction of enterprise 

^Adapted from Principles of Political Economy, II, 211-214 (1893). 



THE BUSINESS CYCLE 



209 



is evidenced by the reduction in the flotation of companies ; the slack- 
ening of trade is revealed by the statistics of exports and imports, 
by the diminution of the returns of the clearing-houses and railway 
receipts; and the yield to taxes on commodities shows directly the 
decrease in consuming power. A low rate of interest, an abundance 
of "money," a fall in all the more speculative securities, especially 
compared with those of the first class, point to a contraction of en- 
terprise and a check to the expansion of industry. 

Gradually the period of depression gives place to a steady quiet 
improvement, which is shown by similar statistical evidence. As a 
rule, also, there is a slight upward movement in the prices of com- 
modities, and of the securities with dividends dependent on trade. 
An improved demand ior "money" is shown by the gradual rise in 
the rate of discount and a corresponding fall in the price of first- 
class securities with fixed interest. The period of steady prosperity, 
in its turn, gives way to a period of inflation culminating in a crisis. 

It is hazardous to express an opinion on the causes of periodicity 
at a time when the periodicity itself seems questionable, but I ven- 
ture to suggest that the causes should be sought for rather in mental 
than in physical phenomena. The most striking features in the 
well-marked cycles up to 1866 were the contraction, expansion, in- 
flation and final explosion of credit. The cycles were especially 
credit cycles, and the effects on trade were apparently indirect. No 
one now will question the importance of the organization O'f credit 
in production and consumption. But credit, although requiring for 
its full development certain material appliances, is essentially mental. 
Nothing, however, is more characteristic of mental phenomena than 
the oscillations between periods of depression, recovery and exal- 
tation. This is shown in an exaggerated form in nervous disorders. 
It may well happen that the fear and distrust excited by a panic 
fade away in two or three years and give place to a sense of security, 
which in turn engenders over-confidence, and finally speculative 
mania. Of course some people will remiain relatively cautious, and 
indeed the great mass of business may be conducted on sound prin- 
ciples, but it is sufficient to account for the phenomena if any con- 
siderable section of the financial world goes through these emo- 
tional stages. The sympathy of markets is well known, both in in- 
flation and depression. The failure in recent years of the period- 
icity to assert itself in so marked a manner as before may be due to 
some great restraining influence, such as the continuous fall in 
prices, or the suppressed fear of the outbreak of a general war. 



2IO CURRENT ECONOMIC PROBLEMS 

loi. The Rhythm of Business Activity*' 

BY WESL15Y C. MlTCHi;i.I. 

With whatever phase of the business cycle analysis begins, it 
must take for granted the conditions brought about by the preceding 
phase, postponing explanation of these assumptions until it has 
worked around the cycle and come again to its starting-point. 

A revival of activity, then, starts with a legacy from,; depression : 
a level of prices low in comparison with the prices of prosperity, 
drastic reductions in the costs of doing business, narrow margins of 
profit, liberal bank reserves, a conservative policy in capitalizing 
business enterprises and in granting credits, moderate stocks of 
goods, and cautious buying. 

Such conditions are accompanied by an expansion in the physical 
volume of trade. Though slow at first, this expansion is cumula- 
tive. In time an increase in the amount of business which grows 
more rapid as it proceeds will turn dulness into activity. Left to 
itself this transformation is effected by slow degrees ; but it is often 
hastened by some propitious event, such as exceptionally profitable 
harvests, or heavy purchases of supplies by the government. 

A partial revival of industry soon spreads to all parts of the 
business field. For the active enterprises must buy materials and 
current supplies from other enterprises, the latter from still others, 
etc. Meanwhile all enterprises which become busier employ more 
labor, use more borrowed money, and make higher profits. There 
results an increase in family incomes and an expansion of con- 
sumers' demands, which likewise spreads out in ever-widening cir- 
cles. Shopkeepers pass on larger orders to wholesale merchants, 
manufacturers, importers, and producers of raw materials. All 
these enterprises increase the sums they pay to employees, lenders, 
and proprietors. In time the expansion of orders reaches back to 
the enterprises from which the initial impetus was received, and 
then the whole complicated series of reactions begins afresh at a 
higher pitch of intensity. All this while the revival of activity is 
instilling a feeling of optimism among business men. 

The cumulative expansion of the physical volume of trade stops 
the fall in prices and starts a rise. For, when enterprises have in 
sight as much business as they can handle with existing facilities, 
they stand out for higher prices on additional orders. This policy 
prevails because additional orders can be executed only by breaking 
in new hands, starting new miachinery, or buying new equipment. 

"Adapted from Business Cycles, 571-579- Copyright by the author (1913). 
Published by the University of California Press. 



THE BUSINESS CYCLE 211 

The expectation of its coming hastens the advance. Buyers are 
anxious to secure large supplies while the quotations continue low, 
and the first signs of an upward trend bring out a rush of orders. 

The rise of prices spreads rapidly; for every advance puts pres- 
sure on someone to recoup himself by advancing the prices of what 
he has to sell. The resulting changes in price are far from even: 
retail prices lag behind wholesale, and the price of finished products 
behind the price of their raw materials. Among the last-mentioned 
the prices of mineral products reflect changed business conditions 
more regularly than do the prices of forest and farm products. 
Wages rise more promptly, but in less degree than wholesale prices ; 
interest rates on long loans always move sluggishly in the earlier 
stages of revival, while the prices of stocks both precede and exceed 
commodity prices on the rise. 

In a great majority of enterprises larger profits result from 
these divergent fluctuations coupled with the greater physical volume 
of sales. For while the prices of raw materials and of bank loans 
often rise faster than selling prices, the prices of labor lag far 
behind, and the prices making up supplementary costs are mainly 
stereotyped by old agreements. 

The increase of profits, under the spell of optimism, leads to a 
marked expansion of investments. The heavy orders for machin- 
ery, the large contracts for new construction, etc., which result, 
swell still further the physical volume of business, and render yet 
stronger the forces which are driving prices upward. 

Indeed, the salient characteristic of this phase of the business 
cycle is the cumulative working of the various processes which are 
converting a revival of trade into intense prosperity. Not only 
does every increase in the volume of trade cause other increases, 
every convert to optimism make new converts, and every advance 
in price furnish an incentive for new advances ; but the growth of 
trade also helps to spread optimism and to raise prices, while op- 
timism and rising prices support each other. Finally the changes 
going forward swell profits and encourage investments, while high 
profits and heavy investments react by augmenting trade, justify- 
ing optimism, and raising prices. 

While the processes just sketched work cumulatively for a time 
to enhance prosperity, they also cause a slow accumulation of 
stresses within the balanced system of business — stresses which 
ultimately undermine the conditions upon which prosperity rests. 

Among these is the gradual increase in the cost of doing busi- 
ness. The decline in supplementary costs per unit ceases when 
enterprises have secured all the business they can handle with their 
standard equipment, and a slow increase in these costs begins when 



212 CURRENT ECONOMIC PROBLEMS 

the expiration of old contracts makes necessary renewals at higher 
rates. Meanwhile prime costs rise at a relatively rapid rate. The 
price of labor rises both because of an advance in nominal wages 
and because of higher rates for overtime. More serious is a decline 
in the efficiency of labor, because of the employment of undesirables, 
and because crews cannot be driven at top speed when jobs are more 
numerous than men. The prices of raw material rise faster on the 
average than the selling prices of products. Finally numerous small 
wastes creep up when m{anagers are hurried by the press of orders. 

A second stress is the accumulating tension of investment and 
money markets. The supply of funds available at the old rates 
fails to keep pace with the swelling demand. It becomes difficult 
to negotiate new issues of securities except on onerous terms, and 
men of affairs complain of the "scarcity of capital." Nor does 
the supply of bank loans, limited by reserves, grow fast enough to 
keep up with the demand. Active trade keeps such an amount 
of money in circulation that the cash left in the banks increases 
rather slowly. On the other hand, the demand for loans grows, 
not only with the physical volume of trade, but also with the rise 
of prices, and with the desire of men of affairs to use their own 
funds for controlling as many businesses as possible. 

Tension in the bond and money m,arkets is unfavorable to the 
continuance of prosperity, not only because high rates of interest 
reduce the prospective margins of profit, but also because they 
check the expansion of the volume of trade out of which prosperity 
develops. Many projected ventures are relinquished because bor- 
rowers conclude that interest would absorb too much of their 
profits. 

The group producing industrial equipment suffers especially. 
In the earlier stages of prosperity this group enjoys exceptional ac- 
tivity. But when the market for bonds becomes stringent and the 
cost of construction high, business enterprises defer the execution 
of plans for extending old or erecting new plants. As a result con- 
tracts for this kind of work become less numerous as the climax of 
prosperity approaches. Then the steel mills, foundries, machine 
factories, lumber mills, construction companies, etc., find their orders 
for future delivery falling off. 

The larger the structure of prosperity, the more severe become 
these internal stresses. The only effective means of preventing 
disaster while continuing to build is to raise selling prices time after 
time high enough to offset the encroachment of costs upon profits, 
and to keep investors willing to contract for fresh industrial equip- 
ment. 



. THE BUSINESS CYCLE 213 

But it is impossible to keep selling prices rising for an indefinite 
time. In default of other checks, the inadequacy of cash reserves 
would ultimately compel the banks to refuse a further expansion of 
loans on any terms. But before this stage has been reached, the 
rise of prices is stopped by the consequences of its own inevitable 
inequalities. These become more glaring the higher the general 
level is forced; after a time they threaten serious reductions of 
profits to certain business enterprises, and the troubles of these vic- 
tims dissolve that confidence in the security of credits with which 
the whole towering structure of prosperity has been cemented. 

In certain lines in which selling prices are stereotyped by law, 
by contracts for long terms, by custom, or by business policy, selling 
prices cannot be raised to prevent a reduction of profits. In other 
lines prices are always subject to the incalculable chances of the 
harvests. In some lines the recent construction of new equipment 
has increased the capacity for production faster than the demand 
for the wares has expanded under the repressing influence of high 
prices. The unwillingness of investors to let fresh contracts 
threatens loss not only to the contracting firms but to the enterprises 
from which they buy materials. Finally the success of some enter- 
prises in raising prices fast enough to defend their profits aggravates 
the difficulties of the men who are in trouble. 

As prosperity approaches its height, then, a sharp contrast de- 
velops between the business prospects of different enterprises. Many 
are making more money than at any previous stage in the business 
cycle. But an important minority faces the prospect of declining 
profits. The more intense prosperity becomes, the larger grows this 
threatened group. In time these conditions bred by prosperity will 
force radical readjustment. 

Such a decline of profits threatens consequences worse than 
the failure to realize expected dividends. For it arouses doubt 
about the future of outstanding credits. Business credit is based 
primarily upon the capitalized value of present and prospective 
profits, and the volume of credits outstanding at the zenith of pros- 
perity is adjusted to the great expectations which prevail when 
affairs are optimistic. The rise of interest rates has already nar- 
rowed the margins of security behind credits by reducing the capi- 
talized value of given profits. When profits begin to waver, credi- 
tors begin to fear lest the shrinkage in the market rating of business 
enterprises which owe them money will leave no adequate security 
for repayment. Hence they refuse renewals of old loans to enter- 
prises which cannot stave off a decline in profits, and press for 
settlement of outstanding accounts. 



214 CURRENT ECONOMIC PROBLEMS 

Thus prosperity ultimately brings on conditions which start a 
liquidation of the huge credits which it has piled up. And in the 
course of this liquidation prosperity merges into crisis. Once begun 
the process of liquidation extends rapidly, partly because most 
enterprises called upon to settle put similar pressure on their own 
debtors, and partly because news presently leaks out and other credi- 
tors take alarm. 

While this financial readjustment is under way, the problem of 
making profits is subordinated to the more vital problem of main- 
taining solvency. Business managers nurse their financial resources 
rather than push their sales. In consequence the volume of new 
orders falls off rapidly. The prospect of profits is dimmed. Ex- 
pansion .gives place to contraction. Discount rates rise higher than 
usual, securities and commbdities fall in price, and working forces 
are reduced. But there is no epidemic of bankruptcy, no run upon 
banks, and no spasmodic interruption of ordinary business proc- 
esses. 

Crises, however, may degenerate into panics. When the process 
of liquidation reaches a weak link in the chain of interlocking credits 
and the bankruptcy of some conspicuous enterprise spreads un- 
reasoning alarm, the banks are suddenly forced to meet a double 
strain — a sharp increase in the demand for loans and in the dem.and 
for repayment of deposits. If the banks meet both demands, the 
alarm quickly subsides. But if many solvent business men are refused 
accommodation at any price, and depositors are refused payment in 
full, the alarm turns into a panic. A restriction of payments by 
banks gives rise to a premium upon currency, to hoarding of cash, 
and to the use of various unlawful substitutes for money. Interest 
rates may go to three or four times their usual figures, causing forced 
suspensions and bankruptcies. There follow appeals to the govern- 
ment for extraordinary aid, frantic efforts to import gold, the issue 
of clearing-house loan certificates, and an increase in bank-note 
circulation as rapidly as the existing system permits. Collections 
fall into arrears, workmen are discharged, stocks fall to extremely 
low levels, commodity prices are disorganized by sacrifice sales, and 
the volume of business is violently contracted. 

There follows a period during which depression spreads over 
the whole field of business and grows more severe. Consumers' 
demand declines in consequence of wholesale discharge of wage- 
earners. With it falls the business demand for raw materials, cur- 
rent supplies, and equipment. Still more severe is the shrinkage in 
the investors' demand for construction work of all kinds. The 
. contraction in the physical volume of business which results from 
these shrinkages in demand is cumulative, since every reduction of 



THE BUSINESS CYCLE 215 

employment causes a reduction in consumers' demand, thereby 
starting again the whole series of reactions at a higher pitch of 
intensity. 

With this contraction goes a fall in prices. For when current 
orders are insufficient to employ the existing equipment, competi- 
tion for business becomes keener. jThis decline spreads through 
the regular commercial channels which connect one enterprise with 
another, and is cumulative, since every reduction in price facilitates 
reductions in other prices, and the latter reductions react to cause 
fresh reductions at the starting-point. 

The fall in prices is characterized by certain regularly recurring 
differences in degree. Wholesale prices fall faster than retail, and 
the prices of raw materials faster than those of manufactured prod- 
ucts. The prices of raw mineral products follow a more regular 
course than those of forest or farm products. Wages and interest 
on long-time loans decline in less degree than commodity prices. 
The only important group of prices to rise is high-grade bonds. 

The contraction in the volume of trade and the fall in prices 
reduce the margin of present and prospective profits, spread dis- 
couragement, and check enterprise. But they also set in motion 
certain processes of readjustment by which the depression is 
overcome. 

The prime costs of doing business are reduced by the fall in 
the prices of raw material and of bank loans, by the marked increases 
in the efficiency of labor which comjes when employment is scarce, 
and by closer economy by managers. Supplementary costs are re- 
duced by reduction of rentals and refunding of loans, by writing 
down depreciated properties, and by admitting that a recapitaliza- 
tion has been effected on the basis of lower profits. 

While costs are being reduced, the demand for goods begins 
slowly to expand. Accumulated stocks left over from prosperity 
are exhausted, and current consumption requires current production. 
Clothing, furniture and machinery are discarded and replaced. 
New tastes appear among consumers and new methods among pro- 
ducers, giving rise to demand for novel products. Most important 
of all, the investment demand for industrial equipment revives. 
Capitalists become less timid as the crisis recedes into the past, the 
low rates of interest on long-time bonds encourages borrowing, and 
contracts can be let on most favorable conditions. 

Once these forces have set the physical volume of trade to 
expanding, the increase proves cumulative. Business prospects 
become gradually brighter. Everything awaits a revival of activity 
which will begin when some fortunate circumstance gives a fillip to 
demand, or, in the absence of such an event, when the slow growth 



2i6 CURRENT ECONOMIC PROBLEMS 

of the volume of business has filled order books and paved the way 
for a new rise in prices. Such is the stage of the business cycle 
with which the analysis begins, and, having accounted for its own 
beginning, the analysis ends. 

C. THE ANTECEDENTS OF CRISES 
102. The Causes of the Panic of 1893'^ 

BY W. JE;TT I.AUCK 

But what was the local and the true cause of the crisis of 1893 
in this country ? It cannot be said to have been due to a scarcity of 
money in the United States at that time. During the entire period 
1878-93 the amount of money in circulation more than doubled. 
Consequently the money supply was ample. On the other hand, it 
cannot be maintained that the crisis of 1893 was caused by an ex- 
tension of the mercantile credits such as brought about the dis- 
astrous collapse of 1873, for business houses and industrial estab- 
lishments during the period 1891-93, instead of extending, were 
curtailing their operations, and were arranging their plans in the 
expectation of a breakdown in the financial machinery of the coun- 
try. They could not have engaged in any extended or hazardous 
activities if they had been inclined to do so, for the reason, as al- 
ready seen, that very little, if any, foreign capital was obtainable 
for investment in the United States after 1891, and American cap- 
ital likev/ise refused to enter into doubtful financial or industrial 
undertakings. So far as the withdrawal of foreign and domestic 
funds, however, brought about industrial and business disaster, it 
was not a direct cause of the crisis, but only the result which flowed 
out of the operation of the primary and fundamental cause. 

This cause to which the crisis of 1893 is directly and wholly 
attributable consisted of a widespread fear, both at home and 
abroad, that the United States would not be able to maintain a gold 
standard of payments. The ver}^ nature of the crisis itself bears 
out this conclusion. It was essentially a monetary crisis, and its 
typical feature consisted in the numerous failures of banks and 
financial institutions. Moreover, the precipitation of and the recov- 
ery from the crisis furnishes additional evidence to bear out the fore- 
going claim. The beginning of the crisis was marked by the decline 
of the Treasury gold reserve, on April 22, below the $100,000,000 
limit ; the ending of the resultant industrial and financial chaos dated 

''Adapted from The Causes of the Panic of 1893, 118-121. Copyright by 
Hart, Schaflfner & Marx (1907). 



THE BUSINESS CYCLE 217 

from the assurance, on August 28, of the repeal of the Silver Law 
of 1890. 

The apprehension in 1893 3-S to^ the fixity of the gold standard 
of payments arose indirectly out of the silver agitation and legis- 
lation during the period 1878-90, and was directly traceable to the 
operation of the Sherman Silver Purchase Law of 1890. For sev- 
enteen years, 1878-90, the gold standard of payments was constantly 
threatened, and the crisis of 1893 was practically the culmination 
of this long period of uncertainty. Under the operation of the Silver 
Act of 1878, the country received a serious shock to its confidence 
in the fixity of 'the gold standard. During the two years, 1884-86, 
when the silver issues of the country became redundant, the dis- 
trust in the ability of the Treasury to maintain gold payments became 
so great that gold was withheld in the payments of customs duties, 
and silver certificates were worked Oifl: on the Treasury. Additions 
to the Treasury's supply of gold were thus cut off, and the gold re- 
serve declined to $115,000,000. As a consequence, apprehension as 
to the maintenance oi gold payments became widespread, and a 
panic was narrowly averted. As it was, the stream of silver was 
only prevented from overflowing the Treasury by the action of the 
Treasury officials in employing artificial devices to create a vacuum 
in the circulation. 

The advocates O'f the free coinage of silver, however, held the 
balance of political power during the first session of the Fifty-first 
Congress, and as a result of their agitation the Sherman Law was 
passed, which almost doubled the amount of silver obligations an- 
nually issued by the Government. The currency oi the country 
soon became redundant, and silver certificates and Treasury notes 
were used in the payments of public dues, while gold was hoarded. 
Consequently the Treasury goM reserve rapidly declined, and fear 
for the maintenance of the standard again arose. Foreign investors 
and exporters saw the danger in the situation even before the people 
of this country, and began to withdraw the funds which they had 
invested in this country during the period 1886-90. Moreover, they 
called for the payment of trade balances in gold. Gold was, there- 
fore, demanded for export. But the banks in the United States 
were hoarding gold, and gold for export could practically be ob- 
tained only by the presentation of legal -tender notes at the Treasury 
for redemption. This operation caused a further inroad upon the 
Treasury gold reserve. Larger amounts of funds were drawn from 
the country, and increasing amounts of gold flowed out of the Treas- 
ury in the redemption of legal-tenders. The limit was finally reached 
on April 22, 1895, when the gold resei"ve fell below the danger-line. 



2i8 CURRENT ECONOMIC PROBLEMS 

At that time the fears of the public over the question of the standard 
of payments reached a climax. 

As soon as it became known that the gold reserve of the Treas- 
ury had declined below the danger-point of $100,000,000 the appre- 
hension relative to the fixity of the standard developed intO' a panic. 
There was an immediate rush to realize on all descriptions of prop- 
erty before the gold standard was abandoned. The public were 
afraid of the adoption, as the standard of payments, of a silver dollar 
which was worth only fifty cents in gold. At the same time over- 
whelming demands were made upon the banks to pay their accounts 
in gold OT specie, and the cash thus obtained by" depositors was 
hoarded and the existing money supply contracted. Under these 
conditions gold seemed scarce. In reality gold was only relatively 
scarce in comparison with the abnormal offering of property for 
sale on account of the fear of the silver standard. In the face of 
the universal demand, however, tO' convert property intO' cash or 
some other liquid form of exchange, those having obligations to 
meet found it impossible to secure funds, and the result was soon 
seen in widespread industrial and financial disaster, 

103. The Irrepressible Crisis^ 

BY W. H. IvOUGH^ JR. 

We may make a list of twelve factors to be considered in sizing 
up the present situation. They are arranged approximately in 
inverse order to their immediate influence. 

1. The state of the public mind. 

2. Production and volume of credit in extractive industries. 

3. Production and volume of credit in manufacturing industries. 

4. Production and volume of credit in transportation industries. 

5. Output of mortgages and bonds. 

6. Output of credit currency. 

7. Output of loans and discounts. 

8. Output of book credits. 

9. Trend of general prices. 

10. Treasury and bank reserves of cash. 

11. Output of gold. 

12. Tendency of foreign exchange. 

^Adapted from an article in Moody's Magasine, III, 586-592. Copyright 
(April, 1907). This article was outlined in February, 1907, and barely missed 
getting into the March number of Moody's in which editorial mention of it 
was made. Its statements as to financial weakness were, at least in part, 
verified by the extreme declines in security values during the month of March. 



THE BUSINESS CYCLE 219 

If we could get complete and accurate information about each 
one of these twelve factors we could come to some definite and 
practically certain conclusion as to the business future. Suppose 
we try to sum up briefly the data available at present about each of 
the factors named. 

1. It is obvious that neither over-confidence nor speculative 
mania is or has been especially strong. On the contrary, intelligent 
opinion is notably conservative. Retrenchment, not headlong ex- 
pansion, is the order of the day. Land booms have been reported 
f romi various parts of the country, but apparently they have not been 
attended with the excitement that has existed in such cases at other 
times, 

2. The extractive industries, agriculture and mining, have made 
new records in volume of production in the year just passed with- 
out interfering with prices to any marked extent. The yields of corn 
and winter wheat were greater than ever before. Other crops were, 
on the whole, extraordinary, and 1906 came as the climax of several 

'previous years of large agricultural output. The prospects for 1907 
are favorable. 

3. Manufacturing industries, as is well known, have made great 
strides in the last three years. To take two examples which happen 
to be at hand, we find new buildings contracted for in 1906 worth 
$750,000,000 and we find an output of 25,000,000 tons of pig iron 
in 1906, against 23,000,000 tons in 1905, the best previous year. The 
pig iron was used largely for structural steel and railroad equip- 
ment. A falling off in the demand for these two products would 
undoubtedly affect a great amount' of outstanding securities, and 
short time credit. In the opinion of excellent judges, a decline in 
the demand is already at hand, and will in all probability become 
more evident as the year progresses. As tO' other lines of manufac- 
turing we may say, in general, that production is large and increas- 
ing, but apparently not yet excessive. 

4. New railroad trackage built in 1906 reached a total of over 
6,000 miles ; but this new mileage is nothing compared to that con- 
templated for the next few years. The Northwestern railroads are 
especially active, and in that region the "era of competitive railroad 
building," predicted by E. H. Harriman, is at hand. What the 
effects will be on the large volume of new railroad stocks remains to 
be seen. Within the last twO' months railroad managers have begun 
to move a little more slowly in extending and improving their lines. 
Nevertheless railroad reibuilding and enlargement is still progressing 
on a great scale, for transportation facilities are plainly inadequate. 



220 . CURRENT ECONOMIC PROBLEMS 

5. In considering long time debts, we should note first the strik- 
ing unpopularity of bonds with the investing public. The reluc- 
tance of investors to put their money into mortgages and bonds is, 
of course, a natural result of high prices and big semi-speculative 
profits, which make bond returns look small. 

6. In the amount of credit currency issued by the government 
we find, of course, no important change in the last few years. The 
volume of bank notes outstanding, however, has steadily increased 
from $172,000,000, in 1894, to about $585,000,000, now. The fact 
that the increase has been brought about by more liberal laws and 
by the lowered price of government bonds, rather than by business 
demands, naturally leads us to suspect its stability. 

7. The present status of bank loans and discounts is best indi- 
cated by the following totals of this item for all national banks : 
1896, $1,873,000,000; 1900, $2,710,000,000; 1906, $4,300,000,000. 
These are most surprising figures in view of the comparatively slight 
increase in population and real capital during the same period. They 
grow more astonishing still when we think of the great increase in 
other banking business during the last ten years. The rate of in- 
crease would be almost beyond belief if the figures were not thor- 
oughly trustworthy. 

8. Under the term "book credits" I mean to include all the 
great body of accommodation extended by merchants to individual 
customers and by wholesalers to retail firms. Of course it is im- 
possible to compute its amount. All we can say is that, beyond ques- 
tion, it must exceed in volume anything that this country has ever 
previously known. If a wave of credit restriction should set in, a 
great many individuals and firms would be compelled to shorten 
sail in a hurry. 

9. The trend of general prices in the last few years is too well 
known to call for much discussion. Dun's index numbers for a 
few years past are as follows: 1897, 75.5; 1898, 79.9; 1899, 80.4; 
1900, 95.3; 1901, 95.7; 1902, 101.6; 1903, 100.4; 1904, loo.i; 1905, 
100.3 ; 1906, 105.2. These prices are the inevitable result of the out- 
put of gold and of credit during this period. 

10. The total gold coin and certificates in circulation in the 
United States was, in 1896, $497,000,000; in 1900, $811,000,000; in 
1906, $1,263,000,000. The total national bank reserves of lawful 
money, in September, 1896, was $343,000,000; in 1900, $520,000,000; 
in 1906, $626,000,000'. The ratio* of cash on hand to deposits at 
corresponding periods of the last few years has been: 1896, 19.1% ; 
1900, 15.9%; 1901, 14-7%; 1902, 13.2%; 1903, 14.3%; 1904, 15%; 
1905, 14% ; 1906, 12.7%. Looking over the banking field, we see 
a general downward tendency in the proportion of cash reserves 



THE BUSINESS CYCLE 221 

to the credit piled up on the reserves. Unless the downward ten- 
dency be reversed, according to all experience, the result will be 
disastrous. It is in order, then, to see what the prospect is of reliev- 
ing the situation by large additions of cash. 

11. The annual gold production of the world has increased 
from $202,000,000, in 1896, to over $400,000,000, in 1906, and the 
outlook is for a still greater production next year. But, sooner or 
later, the rising tide of prices is certain tO' cut off the less profitable 
production and lead to a restriction of output. 

12. We turn, as a last source of temporary relief, to the other 
commercial nations in the hope that from them the United States 
may draw additional supplies of gold. The principal foreign banks 
of the world are estimated to hold about $4,000,000,000 specie, in- 
cluding both gold and silver. The whole commercial world seems 
deluged with prosperity. No nation and no bank has toO' much gold. 
On the contrar}^, every one is reaching eagerly for more on which 
to base an enlarged issue of credit. American banks will seek in 
vain in foreign markets for sufficient additions to their cash reserves. 

The experience of the last hundred years indicates that the forces 
now at work are driving us straight toward a crisis, — and I mean 
by crisis not a Wall Street flurry, such as we have lately seen, which 
may come at any time from purely local influences, but a general, 
temporary break-down of industry. With credit everywhere ex- 
panded tO' the danger point, we are in a position from which only 
two means of escape are possible. One is a large and rapid increase 
in pur gold reserves, which is out of the question. The other is a 
progressive restriction of credit, necessarily gathering momentum 
as it proceeds, which is another name for crisis. Just when or how 
the wave of credit withdrawals will start no one can tell. A big 
failure or a rash bit of legislation, or any one of a hundred inci- 
dents, which under normal conditions would do little harm, might 
set it going. 

So long as the decisive incident does not occur, — and, of course, 
it may not come very soon, possibly not for twO' or three years, — 
prices keep on rising and credit keeps piling up. For that reason the 
longer it is delayed the harder jolt it is likely tO' give. 

104. Industrial Conditions Preceding the Panic^ 

It did not take a prophet to foretell that, following the three 
months' decline in the price of stocks which culminated in the severe 
declines in March, a business depression would follow. The lessons 

"Adapted from an editorial in Moody's Magazine, IV, 103-109. Copy- 
right (July, 1907). 



222 CURRENT ECONOMIC PROBLEMS 

of history make it certain that industrial contraction begins soon 
after a great dechne in stock prices occurs. A few long-headed men 
last fall saw plenty of trouble ahead and began to prepare for it by 
unloading stock at high prices. Not, however, until the middle of 
March were there plenty of bears in evidence. Although financial 
experts worked overtime in March to convince us that the decline 
was temporary, due to mischievous legislation, close observers no- 
ticed within a few weeks after the collapse that the demand for 
luxuries, like diamonds, automobiles, and pianos, began to decline. 
Soon the railroads began to curtail improvements ; then manufac- 
turers of electric supplies began to lay men off; then we read that 
the department stores of New York had discharged 2,000 employees, 
and expected to discharge 4,000 more; next we heard that manu- 
facturers in various lines were curtailing output, and that many big 
wholesale mierchants had instructed their buyers in Europe to curtail 
purchases. A little later there appeared statistics of many kinds 
that indicate a shrinkage in business. Bank clearings, railroad earn- 
ings, smaller volume of business, and unsuccessful strikes are some 
of the evidences of the depression already upon us. 

Because of the destruction of old capital and new issues of 
securities calling for more and more new capital as well as the 
unparalleled construction of buildings and permanent improve- 
ments, turning circulating into fixed capital, the banking situa- 
tion is now about the worst ever known. Never were liabilities so 
great and cash reserves lo'wer in proportion to liabilities. Gradually 
conditions appear to be growing worse instead of better. The 
forced liquidation in bonds and stocks had not this year been suffi- 
cient to improve the credit situation. 

The depreciation in shares is due to the rise in the price of cap- 
ital. The development of industrial enterprise has recently been too 
rapid for available capital. The one great cause is the lack of cap- 
ital to carry on the world's business on the scale now planned. The 
industrial and financial world has overreached itself. Although new 
capital is being created faster than ever before, the supply is not 
equal to the demand, and the business of the world must slacken 
for awhile. 

That the cash reserves oi the world are low, as compared with 
banking liabilities, is beyond question. In this country the surplus 
reserve, as shown by the New York bank statement of July 6, was 
$856,250. This is the first time since 1893 that the surplus reserve 
has fallen below $5,000,000, for the first week in July. Even more 
significant is the fact that loans have been increasing steadily in 
proportion to deposits, and that they now exceed deposits by 3.4%. 



THE BUSINESS CYCLE 223 

In 1905 deposits exceeded loans by about 4%. These figures indi- 
cate an unstable equilibrium in the business world. 

If these statistics are a fair index, the business world is today 
insolvent, under panic conditions. It owes more than it can pay, 
except by further borrowing from the banks. All that is necessary 
to precipitate a panic under such conditions is for the solvent por- 
tion of the depositors to become frightened and to .withdraw their 
bank deposits. The banks will then be compelled to call loans and 
to demand payment from the insolvent portion. Since only 5.6% 
of the resources of the banks are in cash, it is probable that many 
national banks are in a weak condition. Possibly the brakes will yet 
be applied in time to prevent serious trouble and to enable us to 
pass through the coming financial ordeal with a very slight reaction. 

105. The Arrested Crisis of 1907^" 

BY EDWIN R. A. SElvlGMAN 

The crisis of 1907 is on the whole not comparable in magnitude 
to that of 1857 or that of 1873. The reasons for this nmy be 
classified under five heads. 

In the first place, the very rrtagnitude of the country's resources 
has been a favorable factor. The unparalleled prosperity of the 
last decade has made possible the accumulation of vast reserves, not 
only by great corporations, but also by average business men. This 
reserve has acted as a buflfer to the shock of reaction and has 
softened the impact through a speedy restoration of confidence in 
the excellence of the country's assets and in the real solvency of 
business. 

Secondly, the crops have been large and valuable. It must be 
remembered that, notwithstanding all ' recent developments, this 
country is still primarily agricultural and that upon our great crops' 
depends in large mjcasure the effective demand which sets and keeps 
in motion the wheels of business activity. By a fortunate coincidence 
the crisis was attended by a phenomenon which in ordinary times 
would have spelled prosperity, and which helped to bring back 
normal conditions. 

In the third place, the overcapitalization of values was somewhat 
less conspicuous than hitherto in transportation. Some former crises 

^"Adapted from "The Crisis of 1907 in the Light of History," in The 
Currency Problem and the Financial Situation, xx-xxv. Copyright by the 
Columbia University Press (igo8). 



224 CURRENT ECONOMIC PROBLEMS 

have been brought on primarily by the speculative building of rail- 
roads. During the past five years the annual increment of con- 
struction has been only four or five thousand miles. The conse- 
quence has been that with the rapid upbuilding of the country the 
railways have grown up to their capitalization. For some time 
there has been scarcely any overcapitahzation. A striking proof of 
the absence of any real discrepancy between normal values and 
capitalization of earning capacity is afforded by the congestion of 
traffic a year or two ago. 

Fourthly, the crisis was preceded by a period of gradual liquida- 
tion. General prices of commodities, with a few notable exceptions, 
like that of copper, were indeed high until well-nigh the outbreak 
of the panic. But the price of securities had for some time under- 
gone a marked shrinkage. This was caused chiefly by the rise in 
the rate of interest. In fact the one phenomenon is really the 
other; for where earnings remain unchanged, the capitalization of 
the earnings depends upon the rate of interest. 

The rise in the interest rate was due in part to the increase in 
the gold output; for an increase in the supply of standard money 
raises not only the price level of all commodities, but the price of 
the use of capital, which we call the general rate of interest. In 
part the increase was due to the relatively smaller amount of 
capital available for investmlent. The fund of free capital has been 
diminishing for the last few years. Hundreds of millions were 
destroyed by the Boer and Japanese wars ; hundreds of millions 
more disappeared through the destruction of San Francisco and 
Valparaiso; and countless millions in addition have been utilized 
to finance the more or less dubious schemes which have sprung up 
in all countries during the years of prosperity. Despite the lack 
of general overcapitalization, the discounting of the future was 
not ample, and the capital was invested more rapidly than the im- 
mediate returns would warrant. The replacement fund, in other 
words, was neither quite large enough nor quite active enough ; and 
with the gradual exhaustion of the available free capital, interest 
rates necessarily rose and security values as a consequence fell. 

The period of liquidation was thus a fortunate event. By check- 
ing the movement of exaltation, and preventing the level of prices 
from being so extreme, it kept the reaction from being so great. 
Where the crest of the wave is lower, the shock of the break is 
less. Had the ascent of prices and values gone on unhindered, the 
convulsion would have been far more severe. 

The fifth and final cause of the lesser magnitude of the crisis 
is the development of trusts. As against the undoubted perils asso- 
ciated with the newer type of business organization, we must put 



THE BUSINESS CYCLE 225 

at least one countervailing advantage. The modern trust is likely 
to exert an undeniably steadying influence on prices. Precisely be- 
cause of the immense interests at stake, and the danger of a reaction, 
the ably managed trust tends toward conservatism. As compared 
with the action of a horde of small competitors under similar condi- 
tions, it is likely during a period of prosperity to refrain from 
marking up prices to the top notch, and to make a more adequate 
provision for the contingencies of the market. With this is likely 
to be associated a greater prevision, which succeeds in a more 
correct adjustment of present investment to future needs. The 
drift of business in its newer form is thus toward a relative checking 
of the discrepancy between estimated and actual earnings, or, in 
other words, toward a retardation in the process of overcapitaliza- 
tion. The influence of trusts in moderating crises and in minimizing 
depressions will doubtless become more apparent with each ensuing 
decade. 

D. THE COURSE OF A CRISIS 
106. The Course o£ the Panic of 1893" 

BY AIvE;xANDER D. NOYES 

The public mind was on the verge of panic. During a year or 
more, it had been continuously disturbed by the undermining of the 
Treasury, a process visible to all observers. The financial situation 
in itself was vulnerable. In all probability, the crash of 1893 would 
have come twelve months before, had it not been for the accident 
of 189 1 's great harvest, in the face of European famine. 

The panic of 1893, in its outbreak and in its culmination, followed 
the several successive steps familiar to all such episodes. One or 
two powerful corporations, which had been leading in the general 
plunge into debt, gave the first signals of distress. On February 
20th, the Philadelphia and Reading Railway Company, with a capital 
of forty millions and a debt of more than $125,000,000, went into 
bankruptcy; on the 5th of May, the National Cordage Company, 
with twenty millions capital and ten millions liabilities followed suit. 
The management of both these enterprises had been marked by the 
rashest sort of speculation; both had been favorites on the specu- 
lative markets. The Cordage Company in particular had kept in the 
race for debt up to the moment of its ruin. In the very month of 
the company's insolvency, its directors declared a heavy cash divi- 
dend ; paid, as may be supposed, out of capital. In January, National 

^'•Adapted from Forty Years of American Finance, 182-206. Copyright 
by G. P. Putnam's Sons (1909). 



226 CURRENT ECONOMIC PROBLEMS 

Cordage stock had advanced twelve per cent on the New York 
market, selHng at 147. Sixteen weeks later, it fell below ten dollars 
per share, and with it, during the opening week of May, the whole 
stock market collapsed. The bubble of inflated credit being punc- 
tured, a general movement of liquidation started. This movement 
immediately developed very serious symptoms. 

Panic is in its nature unreasoning ; therefore, although the finan- 
cial fright of 1893 arose from fear of depreciation of the legal 
tenders, the first act of frightened bank depositors was to withdraw 
these very legal tenders from their banks. Experience has taught 
depositors that in a general collapse of credit the banks would prob- 
ably be the first marks of disaster. Instinct led them to get their 
money out of the banks and into their own possession with the least 
po'ssible delay, therefore when the depositors of interior banks de- 
manded cash, and such banks had in immediate reserve a cash fund 
amounting to only six per cent of their deposits, it followed that the 
Eastern "reserve agents" were drawn upon in eno^rmous sums. 

On the New York banks the strain was particularly violent. 
During the month of June the cash reserves of banks in that city 
decreased nearly twenty millions ; during July, they fell off twenty- 
one millions more. The deposits entrusted toi them by interior 
institutions had been loaned, acording to the banking practice, in 
the Eastern market ; their sudden recall in quantity forced the East- 
ern banks to contract their loans immediately. But in a market 
already struggling to sustain itself from wreck, such wholesale im- 
pairment of resources was a disastrous blow. In the closing days of 
June, the New York money rate on call advanced to seventy-four 
per cent, time loans being wholly unobtainable. The early with- 
drawals by depositors in the country banks were only a slight indi- 
cation of what was to follow. In July, this Western panic had 
reached a stage which seemed to foreshadow general bankruptcy. 
Two classes of interior institutions went down immediately — the 
weaker savings banks, and private banks, distributed in various pro- 
vincial towns, which had fostered speculation through the use of 
their combined deposits by the men who controlled them all. 

In not a few instances, country banks were forced to suspend at 
a moment when their own cash reserves were on their way to them 
from depository centers. Out of the total of one hundred and fifty- 
eight national bank failures of the year, one hundred and fifty-three 
were in the West and South. How wide-spread the destruction was 
among other interior banking institutions may be judged from the 
fact that the season's record of suspension comprised 172 State 



THE BUSINESS CYCLE 227 

banks, 177 private banks, 47 savings-banks, 13 loan and trust com- 
panies, and 16 mortgage companies. 

During the month of July, in the face of their own distress, the 
New York banks were shipping every week as much as $11,000,000 
cash to these Western institutions. Ordinarily, such an enormous 
drain would have found compensation in import of foreign gold, 
and, in fact, sterling exchange declined far below the normal gold 
import point. But the blockade of credit was so complete that oper- 
ations in exchange, even for the import of foreign specie, were im- 
practicable. Banks with impaired reserves would not lend even on 
the collateral of drafts on London. 

So large a part, indeed, of the Clearing-House debit balances 
were now discharged in loan certificates that a number of banks 
adopted the extreme measure of refusing to pay cash for the checks 
of their own depositors. Long continued, a situation of this kind 
must reduce a portion of the community almost to a state of barter ; 
and in fact a number of large employers of labor actually made 
plans in 1893 to issue a currency of their own, redeemable when 
the banks had resumed cash payments. On the 25th of July, the 
Erie Railroad failed, the powerful Milwaukee Bank suspended, and 
the situation appeared well-nigh hopeless. 

Relief came in two distinct and remarkable ways. Large as the 
volume of outstanding loan certificates already was, three New York 
banks combined to take out three to four millions more, and this 
credit fund was wholly used to "facilitate gold imports. At almost 
the same time, the number of city banks refusing to cash depositors' 
checks had grown sO' considerable that well-known money-brokers 
advertised in the daily papers that they would pay in certified bank 
checks a premium for currency. This singular operation virtually 
meant the sale of bank checks for cash at a discount. Through the 
money-brokers, therefore, depositors paid in checks the face value 
of such currency as was offered, plus an additional percentage. 

This premium rose from one and a half to four per cent, and at 
the higher figures attracted a mass of hoarded currency into the 
brokers' hands. This expedient was applied on an unusually large 
scale, and it had the good result of helping to keep the wheels of 
industr}' moving. Its bad result was that it caused suspension of 
cash payments in the majority of city banks; for, of course, when a 
premium of four per cent was offered in Wall Street, for any kind 
of currency, it was out of the question for the banks to respond un- 
hesitatingly to demands for cash by speculative depositors. Most of 
the banks cashed freely the checks of depositors where it was shown 
that the cash was needed for personal or business uses. 



228 CURRENT ECONOMIC PROBLEMS 

The panic, in short, had ended, but not until the movement of 
liquidation had run its course. The record oi business failures for 
the year gives some conception of the ruin involved in this forced 
liquidation. Commercial failures alone in 1893 were three times as 
numerous as those of 1873, and the aggregate liabilities involved 
were fully fifty per cent greater. It was computed that nine com- 
mercial houses out of every thousand doing business in the United 
States failed in 1873 ; in 1893, the similar reckoning showed thirteen 
failures in every thousand. 

107. The Course of the Panic of 1907^^ 

BY RAIvPH SCOTT HARRIS 

In July, 1907, it was felt in every circle that business trembled 
on the edge of an abyss. A continued money stringency forced 
Secretary Cortelyou in August to make deposits in banks and accept 
as security state, municipal and railway bonds. Beginning in Sep- 
tember there was a tone of ill-concealed fright among the most 
hopeful. Only the financial papers attempted to coax themselves 
back into the old confidence. During the second week in October 
call loans in New York ranged from 2)^ to 6 per cent; time loans 
from 6 to 7 per cent ; commercial paper from 7 to 7^ per cent. 
In these two weeks there were twice as many failures as in the same 
period of 1906. There were five times as many manufacturing 
failures in September, 1907, as in September, 1906. 

A series of bank failures precipitated the spectacular part of the 
crisis. The first intimiation of upheaval was the failure of the 
Stock Exchange firm of which Otto C. Heinze was the head. The 
suspension was due to a failure to corner the copper market. There 
was a well-defined suspicion that F. Augustus Heinze, president of 
the Mercantile National Bank, was interested in his brother's ven- 
tures, and that the bank was being "used" in this connection. He 
and his supposed allies fell into public distrust. Seven banks and a 
trust company with capital of $21,000,000 and deposits of $71,- 
000,000 were dominated by these interests. Believing them able to 
weather the storm;, the Clearing House Association agreed to help 
them out if Heinze and his associates were eliminated. This was 
done. A few days later, however, the National Bank of Commerce 
refused to clear any longer for the Knickerbocker Trust Company, 
whose president was thought to be allied with the suspected inter- 
ests. The result was a run on the Knickerbocker Trust Company 

'■^Adapted from Practical Banking, 250-257. Copyright by the author. 
Published by Houghton Mifflin Co. (iQiS). 



THE BUSINESS CYCLE 229 

which, after paying out $8,000,000 in three hours, closed its doors. 
Runs followed on the Lincoln Trust Company and on the Trust 
Company of North America. Following several conspicuous com- 
mercial failures, other banks in New York closed for safety's sake. 

Meanwhile the money scrarqble began. Banks were forced to 
try to call loans to be prepared for the demand of banks and indi- 
vidual depositors. The Secretary of the Treasury deposited $35,- 
000,000 in national banks in New York in four days. 

Stock Exchange prices collapsed. A syndicate, headed by the 
late J. P. Morgan, stated that it would stand under the market, and 
placed $25,000,000 on call at 10 per cent; later $10,000,000 was made 
available at 50 per cent, the high price being fixed to discourage 
speculation. Soon the banks began to restrict cash payments ; clear- 
ing-house loan certificates were issued. The demand for cash 
started a premium on currency the next week which continued the 
rest of the year. It offered an incentive for withdrawal of deposits. 
Large failures occurred as the result of the money stringency. On 
November 9 arrived the first large shipment of more than $100,- 
000,000 in gold, imported to relieve the money stringency. The 
banks had already increased their circulating notes at this time. 

But in the meantime the panic had seized the interior. Banks in 
most of the cities, over 25,000, suspended cash payments. The 
clearing-houses stood guaranty on certificates. It is estimated that 
over $500,000,000 of substitute paper was issued. The country 
banks, having no clearing-house affiliations, suiTered most. Many 
failures occurred among them. 

Shipments of money to the West were made from New York. 
These varied from $4,400,000 for the week ending October 19, to 
$22,600,000 for the week ending November 16. In the week ending 
January 4 the tide turned and $5,500,000 was shipped to New York. 
The New York banks supplied the country with $125,000,000 be- 
tween the beginning of the panic and the first of 1908. Still the 
reserves of the Clearing-House banks were not seriously depleted, 
the importation of gold and the federal deposits having almost offset 
the loss of cash. 

Domestic exchange was paralyzed. New York drafts selling 
from sixty cents discount to ten dollars premium in different parts 
of the country. As for foreign exchange, the ordinary rules apply- 
ing were suspended. Drafts on London were bought when the 
export point had been passed, the reason prompting buyers being 
their ability to sell gold at a premium. 

Common stocks fell, as did preferred stocks and bonds, although 
not to so low a point. By the first of the year securities took a 



230 CURRENT ECONOMIC PROBLEMS 

brighter outlook on life. To sustain the stock market, the national 
banks increased loans and discounts some $63,000,000 between the 
last of August and the first of December. This was in addition to 
the syndicate pool of $35,000,000 previously mentioned. 

Perhaps the panic could have been localized had New York 
bankers been able to meet all demands without restriction. But 
restriction inspired country banks with a zeal to provide for any 
disaster. Hoarding followed. In December most country banks 
had higher reserves than at the beginning of the panic. The question 
which each country banker asked himself was. Can I afford to be 
less cautious than other bankers when I know the psychology of 
"panics" and "runs"? 

Failures drop thick and fast when the panic is past. The 
financial battlefield is gory with the slain and, what is more, the 
trampled. And failures after the depression sets in are larger and 
more important. From 3,635 failures in the last three months of 
1907, bankruptcies increased to 4,909 in the first quarter in 1908. 

108. The Order of Events in a Crisis^^ 

BY ARTHUR T. HADI.e;y 

The order of events in a crisis is generally this : 

1. A shock tO' public confidence in a period of liberal, not to 
say inflated, credit, creates a demand for ready money. No' one is 
sure that his neighbor will remain solvent. Each man is therefore 
anxious to secure himself against future loss. Every borrower 
seeks means of paying his obligations and increases the demand for 
money; almost every capitalist tries to enlarge his cash reserves 
and thus lessens the available supply. 

2. This increase of demand and diminution of supply at first 
puts up the interest rate on short-time loans. Money is needed to 
tide over the immediate exigency, and every one is willing to pay 
large prices in order to obtain it. But this is only a temporary 
measure. Under the stress of need for securing money, people who 
have engagements to meet sell their goods at a sacrifice in order 
to obtain it. An unusually large supply of products and securities 
is thrown upon the market just at the time when many property 
owners feel themselves least able to invest, and when some con- 
sumers are restricting their purchases instead of expanding them. 
The temporary increase in the interest rate gives place to a more 
lasting fall in prices. 

'^^ Adapted from Economics, 297-299. Copyright by G. P. Putnam's Sons 
(1896). 



THE BUSINESS CYCLE 231 

3. Such a fall in prices lowers profits. A large numiber of 
people have made engagements with their creditors and with their 
employees based on the supposition that prices will continue at the 
old level. A fall in price renders it impossible to pay interest out 
of current earnings. Readjustments and foreclosures follow one 
another in rapid succession. In cases where the lenders of money 
have obtained proper security the contracts are maintained at the 
expense of the principal of the borrowers. If a railroad bond is 
really secured by stock behind it, the loss falls on the stockholders, 
and the bondholders, ultimately at any rate, receive all that the in- 
terest contract calls for. But if, as frequently happens, the security 
has been a delusive one, the lenders are compelled to assent to a 
reduction of the interest which they believe to be safely guaranteed. 

4. When the interest contracts have been in large measure re- 
adjusted, the chief effect on wages begins to make itself felt. It 
might be supposed, on general grounds, that a fall in price would 
affect the laborer sooner than the investor. But in the early stages 
of a commercial crisis the capitalist is not in a position to dictate 
terms to his laborers. He must make goods and sell goods at any 
price, in order tO' keep his head above water. As long as it lasts, 
the cut-throat competition which lowers profits prevents the demand 
for labor from being very rapidly lessened. It is when readjust- 
ments of interest have been made that the laborers' condition be- 
comes worse. After foreclosure sales have been completed and 
capital is reorganized on a new basis, no capitalist is necessarily 
compelled to work at a loss, and some probably go out of work alto- 
gether. Under these circumstances the demand for labor becomes 
appreciably less than it was, and the price offered falls rapidly. 

The first rnoderate changes are as a rule accepted by the laborers 
as inevitable, but as reductions become more sweeping they are re- 
sisted, particularly because house rents and consumers' prices, owing 
to the inertia of retail trade,, do not fall nearly as fast as producers' 
prices. The workman sees his wages reduced because his employer 
cannot sell goods at the old figure, while the price that he pays 
for his supplies remains nearly the same. He thinks that something 
is wrong and strikes. This usually indicates the beginning of the 
end oi a commercial crisis. It has beco'me a proverb in the financial 
world that railroad strikes give no help to those who are trying to 
depress the price of securities. 

On the contrary, in spite of the losses attending such conflicts, it 
has been found in 1877, 1885, and 1894 that the price of securities 
in general began to go up at the very time when matters seemed 
to be at their worst. There are twO' reasons for this. First, strikes 



232 CURRENT ECONOMIC PROBLEMS 

cut down production in any given line to such an extent as to enable 
competing producers to dispose of their products or services more 
readily. Second, strikes indicate that wage contracts, as well as in- 
terest contracts, have been readjusted to the price conditions which 
prevail, and that matters have therefore reached a point where 
speculators can m^ake arrangements for the future with the assur- 
ance that the marginal price charged by labor and capital for their 
services does not exceed the market price which the consumers are 
likely to pay for the results of such service. 

E. FINANCIAL AND INDUSTRIAL CONDITIONS 
DURING A CRISIS 

109. A Week of Financial History^* 

Our markets have been more disturbed and excited this week 
than at any time this year. The situation looked unpromising when 
the week opened, and became daily more unsettled until Thursday, 
when there was a decided improvement; but yesterday the situation 
was again somewhat less favorable. Monday and Tuesday an un- 
usual number oi failures among our banks and private firms were 
reported in various parts of the coimtr}^, but especially in the West, 
some of them being concerns of long standing and held in high 
repute. On those days, too, rumors became hourly more distinct 
respecting the difficulties Erie's floating debt was causing the man- 
agement and the probability of its becoming needful to put the road 
into the hands of receivers. Tuesday afternoon the announcement 
was made that receivers for the company had been appointed. On 
Wednesday the failures referred to, the Erie receivership, and the 
state of the money market caused an unsettled and feverish opening, 
which conditions were used, and used most effectually, by those seek- 
ing to break prices, values of all the leading stocks gradually melt- 
ing away. This decline was favored by the fact that the outside 
public having money to invest either looked upon the Erie receiver- 
ship as a more disturbing affair than the step warranted, or else 
were discouraged by the frequent flurries and declines in prices 
which have occurred of late, and so for the time being kept off the 
market. The next day, Thursday, the outlook, as already stated, 
was much brighter, and so it was yesterday, though there was some 
reaction from- the previous day, a further large break in General 
Electric stock being a disturbing feature. 

'^^Commercial and Financial Chronicle, July 29, 1893, 162. Copyright 
(1893). 



THE BUSINESS CYCLE 233 

Money on call representing bankers' balances was not stringent 
until Wednesday. The loans early in the week were from 6 to 2 per 
cent, the latter figure being recorded on Monday after the inquiry 
for the day had been satisfied and there seemed to be an abundance 
ofifered. The demand for currency for shipment to the West, stim- 
ulated by the failure of the "Mitchell" bank at Milwaukee, and of 
banks at Louisville and Indianapolis, was urgent on Tuesday, and 
on the following day a calling in of loans by some of the banks and 
trust companies in this city and in Brooklyn created a disturbance 
in the money market, while the fall in stock values induced discrim- 
ination against collateral, and the rate was advanced to three-six- 
teenths of I per cent and interest, equal to^ about 74 per cent per 
annum, and large amounts were loaned at one-eighth of i per cent 
and interest, equal to 51 per cent per annum. On Thursday there 
was an early demand for money which caused 51 per cent to be again 
recorded, but in the afternoon the rate fell to 6 per cent. Yesterday 
the course was much the same, the range being 51 and 2 per cent, 
with the close at the lowest figure. The average for the week was 
probably about 10 per cent. Renewals were at from 6 to 8, and 
while banks and trust companies quoted 6, very little was loaned 
over the counter at this figure, and the institutions that had money 
to loan offered it in the stock exchange. Time contracts continue 
in urgent demand and good rates are bid, but the supply is small 
and chiefly confined to private sources. Neither banks nor trust 
companies are making loans on time, but it is probable that a few 
of the insurance companies and other corporations have yielded to 
the importunities of brokers. The basis of the business is 6 per 
cent; in addition i per cent commission is paid for thirty days, 1J/2 
per cent for sixty days, and 2 per cent for four months. Scarcely 
anything is done in commercial paper, and the few transactions made 
are at such rates as can be agreed upon. Many of the jobbing com- 
mission houses are advising the mills with which they do business 
to shut down, as it is impossible at present to make advances, and 
many of the mills at the East are consequently closing. 

no. General Industrial Conditions in a Crisis^^ 

While special telegrams from many points South and West re- 
port a more hopeful feeling in financial and commercial circles, due 
to the increased currency issue by New York national banks, the 
gold afloat for the United States, and in the expectation that Con- 
gress will promptly repeal the coimpulsory purchase of silver clause 

^^ Adapted from Bradstreet's, August 5 and 12, 1893, 495, 511. 



234 CURRENT ECONOMIC PROBLEMS 

of the Sherman Act, the week has, on the whole, brought more un- 
favorable features in the apparent hoarding and scarcity of currency 
East and West, the near approach of the demand for funds to "move 
the crops," the increase in the shut-down movement by manufactur- 
ers in New England, Middle and Central Western States, and the 
clog to trade shown by prohibitive rates for New York exchange 
at centers East, West, and Northwest. Chicago packers and grain 
shippers selling to interior eastern points, having been unable to 
sell their New York exchange, are ordering the currency to^ pay for 
stuff shipped direct by express, thus doing away with banks. At 
New York credit of both banks and commercial interests is unim- 
paired, but actual money is scarce and commands a premium. The 
arrival of gold in transit is expected to clear the atmosphere and 
relieve p'ressure. Demands for actual currency from, all quarters on 
New York are pressing. The scarcity of small notes and silver dol- 
lars is a feature. Banks are generally refusing or complying only 
partially with requests for large sums. 

The irrational but widespread hoarding of currency has com- 
pelled jobbers and manufacturers in many instances to do business 
more nearly than ever on a cash basis, which has resulted in a further 
restriction of trade throughout the country. This is accompanied 
by such signs of aggravation as increased difficulty in disposing of 
commercial paper, a still greater scarcity of currency at larger cen- 
ters, and a shut-down movement among industrial establishments; 
the latter, together with curtailment of forces in that and in com- 
mercial lines, points tO' the enforced idleness of nearly 1,000,000 
wage-earners within the past two months, as compared with not 
more than 400,000 at the close of 1884, the previous year of greatest 
business depression. The week's bank clearings total is the smallest 
of recent years — $802,000,000 — 17 per cent less than last week and 
20 per cent less than in the week of 1892. 

A hand to mouth demand for staples is reported from Boston ; 
many leading industries have shut down, currency is scarcer, com- 
mercial, paper is ignored, and general business rather more clogged 
than last week, all of which applies as well to New York, Philadel- 
phia, Baltimore, and Pittsburg. 

Increased demands from country banks make currency scarcer 
at Cleveland and Cincinnati, where previous dullness is intensified. 
Business at Louisville is almost at a standstill, banks declining to 
receive country checks even for collection, and preferring not to 
handle New York exchange. General trade is almost on a cash 
basis at Indianapolis, and reduced in volume, which is also true at 
Milwaukee. Chicago bankers are hopeful, owing to the heavy gold 



THE BUSINESS CYCLE 235 

importations, but orders left with jobbers are held awaiting crop 
advices, some of the latter being doubtful. St. Paul, Minneapolis, 
and Duluth jobbers are doing a hand to mouth business, awaiting 
a change in the situation. St. Louis reports a shrinkage in the vol- 
ume of sales of dry goods and hardware, while at Omaha banking 
accommodations and the volume of trade continue in reduced vol- 
ume. Live stock receipts are smaller, with higher prices, and the 
corn crop is damaged in western Nebraska. 

111. The Premium on Currency in 1893^^ 

Other than the President's message and the meeting of Congress, 
which we have remarked upon in a subsequent column, the premium 
on gold and currency that has prevailed has been the important topic. 
This feature in the situation we referred to last week when it had 
developed only very moderate proportions. From that beginning, 
however, the demand for currency gradually grew more urgent, the 
premium rising as high even as 5 per cent, disclosing a marked scarc- 
ity of currency, not alone in this city but very noticeable at Phila- 
delphia and Boston in the East and Chicago and other centers in the 
West. All kinds of currency were in request including even stand- 
ard silver dollars. Foreign bankers also report that i^ per cent 
was paid for gold to arrive. Of course the gold import movement 
had been afifected by these operations, which in turn have raised 
foreign exchange rates materially, since the premium paid raises 
the power of exchange and consequently the point at which gold 
can be imported at a profit. Thursday, however, there were decided 
indications that the transactions in currency had culminated. On 
that day the supply was increased by large offerings and the demand 
slackened. Yesterday the same conditions continued to prevail, and 
the premium on currency dropped to i^ and 2 per cent. 

112. The Hoarding of Currency in 1893" 

BY J. DE) WITT WARNER 

Then developed the feature that will forever characterize the 
stringency of 1893 — instructive to those who have not already learn- 
ed how immaterial is any ordinary supply of legal currency when 
compared with credit in its various forms — the real currency of the 

^^Commercial and Financial Chronicle, August 12, 1893, 196. 
^''Adapted from Sound Currency Year Book, 240 (1896). 



236 CURRENT ECONOMIC PROBLEMS 

country. Almost between morning and night the scramble for cur- 
rency had begun and culminated all over the country, and the pre- 
posterous bulk of our circulating medium had been swallowed up 
as effectually as, in a scarcely less brief period, gold and silver had 
disappeared before the premium on specie a generation before. Cur- 
rency was hoarded until it became so scarce that it had to be bought 
as merchandise at a premium oi i to 3 per cent in checks payable 
through the clearing-house; and to enalDle their families to meet 
petty bills at the summer resorts the merchant and professional men 
of the cities were forced to purchase and send express packages of 
bills or coin; while savings banks hawked their government bond 
investments about the money centers in a vain attempt to secure 
currency. 

113, Estimate of Money Hoarded in 1907^® 

The national banks held $40,839,000 less cash on December 3 
than on August 22. And yet, during this period, the government 
increased its deposits in the national banks by $80,000,000, and there 
was imported about $70,000,000 in gold. Considering this increase 
of about $150,000,000, and the loss of $40,839,000, more than 
$190,000,000 of cash was taken out of the national banks in this 
period. It is quite certain that neither the savings banks nor the 
trust companies increased their cash holdings by any such amount. 
In fact, they had to close their doors to prevent the withdrawal of 
cash. It is probable that the trust companies of the country lost 
considerable cash, and that the savings banks gained none during 
this period. In ordinary years the national banks lose but little cash 
by crop movements — say $25,000,000. This is, perhaps, considerably 
less than the shrinkage this year in the cash holdings of the trust 
companies. It would appear, then, that fully $200,000,000 of cash 
this year disappeared from our banks between August 22 and De- 
cember 3. 

114. Economies in Credit^^ 

In view of the action taken by the New York Clearing House, 
and subsequently adopted by Chicago, St. Louis, Philadelphia, Cin- 
cinnti. New Orleans, Nashville, Birmingham., Baltimore, Louisville, 
Memphis, Alontgomery, Mobile, and many other principal cities 
throughout the country, restricting the shipment of currency, and 

^^Adapted from an editorial in Moody's Magasine, V, 80. Copyright 
(1908). 

"Resolutions passed by the Atlanta Clearing House, October 30, 1907. 



THE BUSINESS CYCLE 237 

the restriction of other business to its proper channel, the Clearing 
House; therefore, be it 

Resolved by the Atlanta Clearing House Association — 

1. That until further notice collections and bank balances be 
settled in exchange for clearing-house certificates. 

2. That checks drawn on the members of this association be 
paid through the Atlanta Clearing House, and correspondents be 
requested to so stamp their checks. 

3. That payments against all accounts, including certificates 
of deposit, be limited to $50 in one day, or $100 in one week. 

4. That exception shall be made to the above in case of pay 
rolls, which shall be paid as follows : All denominations of $5 and 
over in clearing-house certificates, and all denominations of under 
$5 to be paid in cash as desired. 

Resolved further, That the manager of the Atlanta Clearing 
House Association be instructed to give notice to the correspondents 
of the Atlanta Clearing-House banks that the above resolution is in 
effect on and after this date and until further notice, 

115. Shipment of Currency to the Interior-" 

The clearing-house committee knew by experience that the dis- 
sipation of the New York banking reserve, upon which practically 
the credit volume of the nation rests, would alarm the nation, in- 
tensify the panic, and greatly prolong the period of recuperation. 
New York bankers have been severely criticised because they did 
not more fully respond to the demands of country correspondents 
by shipping currency against balances. To have fully honored the 
demands that were pouring in from all sections of the country 
would have dissipated our banking reserve in a fortnight. How 
could it be replenished? Were the interior bankers sending cur- 
rency to New York? What would have been the effect upon the 
country if the New York banking reserve had been entirely de- 
pleted? It would have so intensified the panicky feeling that wide- 
spread commercial disaster would have resulted. The $53,000,000 
deficit in our banking reserve occurred in less than ten days after 
■ the failure of the Knickerbocker Trust Company, and was caused 
by the shipment to interior institutions of the larger portion of that 
amount in that short time. We kept the door of our treasure house 
wide open until for the good of the whole country it became neces- 
sary everywhere to close it. It never was fully closed; currency 
shipments continued in a restricted way throughout the panic, and a 

^"Commercial and Financial Chronicle, October 10, 1908, 84. 



238 CURRENT ECONOMIC PROBLEMS 

larger number of our banks kept up their counter payments as 
usuaL 

F. INDUSTRIAL CONDITIONS DURING A 
DEPRESSION 

116. Panics versus Depressions-'^ 

BY GEORGE H. HULL 

Panic is defined as "a sudden, unreasoning, overpowering fear, 
especially when affecting a large number simultaneously." A 
"Financial Panic" is, therefore, the effect produced upon the finances 
of a country by sudden, unreasoning, and overpowering fright. 

Depression is defined as "a state of dullness or inactivity; a 
protracted season when business falls below the normal." "Indus- 
trial Depression," therefore, means literally a state of dulness or 
inactivity in the industries of the country; a protracted season dur- 
ing which the production of buildings, furniture, goods, machinery, 
etc., falls below the normal. 

A financial panic is precipitated by sudden, excited, and im- 
prudent action. An industrial depression is precipitated by deliber- 
ate, thoughtful, and prudent inaction. One is the result of mental 
excitement, which results in a temporary check to a natural flow of 
the media of exchange. It is a mental disorder. The other is the 
effect of calm', deliberate consideration, which results in reducing 
the rate of production of materials of physical wealth. It is a 
physical disorder. 

A financial panic is an acute malady. Its beginning is sudden, 
intense, vivid, and startling. Its chief element is fright. It par- 
alyzes finances at a single blow. Each subsequent step in its course 
is an alleviation. Each day, week or month shows a marked re- 
covery. From its nature and intensity it is short-lived. 

An industrial depression is a stubborn, chronic malady. Its be- 
ginning is gradual and quiet. It commences and goes on increasing 
in force for many months, unnoticed. Its cause is silently doing its 
fatal work while actual business is increasing by leaps and bounds. 
When actual depression appears, its cause has almost ceased to 
exist. From its nature and its deep-seated growth industrial depres- 
sion is long-lived. 

A financial panic is usually a matter of a few months, weeks, or 
days. An industrial depression is usually a matter of one or more 
years. 

-^Adapted from Industrial Depressions, 18-20. Copyright by Frederick 
A. Stokes Co. (1911). 



THE BUSINESS CYCLE 239 

A financial panic may be compared to a mob, in which a great 
number of excited minds work upon and incite each other until 
men act in a body as no one of them would act if left to himself. 
Industrial depressions, on the other hand, are the cumulative results 
of the deliberate and thoughtful decisions of individual men. 

These two calamities can be classed together only^ because the 
results of each have a disastrous effect upon business. A panic has 
an effect which is short, exciting, and a temporary disaster, not to 
existing material wealth, but to the documentary representatives of 
wealth ; a loss from which the country may entirely recuperate with- 
in a short time. The other is a compulsory laying down of the tools 
which produce wealth, by a vast army of wealth-creators ; a loss 
that can no more be regained than a lost day or year can be re- 
gained. 

117. The Extent of the Depression of 1907-8^^ 

A few facts and figures will indicate the extent of the present 
industrial depression. Bank exchanges at all the leading cities of 
the United States were $2,073,910,424 for the week ending January' 
30, 1908, a decrease of 23.3% compared with the corresponding 
week of 1907, and 37.2% compared with the corresponding week 
of 1906. The decrease in New York and Philadelphia exceeded 
28%, compared with 1906, and was greater than in any other cities. 

For the first two weeks of January, 1908, gross earnings of 
railroads were about 13% less than in 1907. For the last week in 
December they were 15.52% below those of 1906. For the entire 
month of December gross earnings were 1.13%, while net earnings 
were 17.46% less than were those for December, 1906. 

Transactions of the New York stock exchange amounted to 
16,634,817 shares, compared with 22,712,420 in January, 1907. The 
decline in the prices of commodities in the last few months has been 
about 10%. 

The sharp falling ofif in the net earnings of the United States 
Steel Corporation in the last quarter of 1907 show the remarkable 
decline in industry^ The net earnings fell from $17,052,211, in Oc- 
tober, to $10,467,253, in November, and to $5,034,531, in December. 
This is a decline of over 70%. 

The unparalleled number of idle cars afifords a barometer of our 
industrial condition. Today there are approximately 320,000 freight 
cars and 8,000 locomotives standing idle, representing an invest- 
ment of more than $400,000,000, and there are more than 30,000 

^"Adapted from an editorial in Moody's Magazine^ V, 151-154. Copy- 
right (January, igo8). 



240 CURRENT ECONOMIC PROBLEMS 

miemployed trainmen. And yet three months ago there were not 
enough railroad cars to move the traffic of the country. 

The money market affords one of the best barometers of the 
great change that has come over the industrial situation. From a 
deficit of $54,103,600 on November 23, in the surplus reserves of 
the New York Associated Banks, there was a surplus of $40,626,725 
on February i. From rates of 25% or more, last fall for call money, 
we now have rates of less than 2%. From rates of from 7 to 12% for 
time money last fall, we now have rates of from 4 to 45^ % on Stock 
Exchange collateral, and from 5 to 6% on commercial paper. The 
return of hoarded money and the slackening demand for money in 
industrial and commercial operations are mainly responsible for this 
sudden transformation of the money market. 

Already gold exports have begun from this country. They may 
reach a considerable volume before next July. Money rates, how- 
ever, may be expected to remain about as at present. Money rates 
are being followed by rising prices for bonds and other secure 
securities. During January the price of bonds rose about twice as 
much as the price of common stocks. Under existing conditions 
investors find bonds very attractive in view of the uncertainty of 
the situation. Many interior banl<:s have put their idle funds in 
bonds on account of the comparatively high interest return they 
can secure by such a course. 

G. TYPICAL THEORIES OF CRISES 
118. The Fruits of the Exploitation of Labor^^ 

BY SHRANK K. FOSTEjR 

Once in about so many years this country is afiflicted with what 
we call "hard times." It is a striking instance of the limitations 
of human wisdom that the wise men have not been able to diagnose 
the causes of such periodic bad spells. It will not answer to place 
the responsibility upon causes beyond human control. Somebody is 
to blame. Who is it? 

The industrial world is complex. A thousand and one in- 
fluences play upon it. Fictitious values are created. Watered 
stocks and inflated mergers act as sponges to soak up the products 

-^Adapted from "Who Does It?" in The Causes of Industrial Panics in 
the United States, 16-18. Published by the Chicago Federation of Labor 
(1903). 



THE BUSINESS CYCLE 241 

of honest effort. Speculative pools force up prices abnormally. 
All these things help to bring about crises. 

But there is one simple and all-pervasive question, rarely if 
ever taken into account, which explains much ; one condition which, 
more than any other, works toward the glut of markets and the 
periodic depression of industry. This axiomatic proposition may 
be formulated thus : "So long as those who produce wealth do 
not receive for their labor a return sufficient to enable them to buy 
back the equivalent of what they themselves produce, congestion 
is inevitable and depressions will recur. These depressions will 
vary in frequency and intensity in direct ratio to the discrepancy be- 
tween values earned and received." 

The term "producers of wealth" is by no means confined to those 
who work with their hands. The rational estimate must accord its 
full weight to those who direct, invent, organize, and simplify proc- 
esses of production. But, when all else is said, the laborer, as 
making up the great bulk of the market for staple products, is the 
main factor, and his wage-rate and consequent standard of living 
most acutely modify the demand for manufactured products. 

The working of this principle can best be seen by application. 
Suppose, for illustration, that the wages and standard of living of 
all American mechanics were to be at once crowded down to the level 
of the laborer recently arrived from Southern Europe. It requires 
httle perspicacity to foretell the result of such a metamorphosis on 
American manufactures. There would be almost immediately whole- 
sale stoppages in all those thousand and one industries now supported 
by the home market. 

But that which is true in the extreme case is also true in degree 
in the rise and fall of wages in narrower margins. A decrease of 10 
per cent in wages all along the line in American industry means that 
hundreds of millions of dollars less will be spent for manufactured 
products. And every reduction in wages operates in the same direc- 
tion, while every increase — up, of course, to the absorption of the 
full margin of profit — means a stimulation of the market. 

It is not the millionaires who use up the products of most wealth- 
producers, but the people of moderate means, who depend upon 
their daily labor for their daily bread. Consequently panics will 
recur until the margin of profit in the production of commodities goes 
to the producer instead of to the speculator or the exploiter. 



242 CURRENT ECONOMIC PROBLEMS 

119. The Impossibility of Over-Production-* 

BY JOPIN STUART MII,I, 

Dearth, or scarcity, on the one hand, and over-supply, or, in 
mercantile language, glut, on the other, are incident to all commodi- 
ties. Because this phenomena of over-supply may exist in the case 
of any one commodity, many persons have thought that it may exist 
v^ith regard to all commodities; that there may be a general over- 
production of wealth; and a consequent depressed condition of all 
classes of producers. 

The doctrine seems to me to involve so much inconsistency in 
its very conception that I feel considerable difficulty in giving any 
clear statement of it. In general the theory is that there may be an 
excess of productions in general beyond the demand for them ; that 
when this happens, purchasers cannot be found at prices which 
will repay the cost of production; that there ensues a general de- 
pression of prices. The advocates of this theory maintain that 
the accumulation of capital may proceed too fast; and enjoin the 
rich to guard against this evil by an ample unproductive consump- 
tion. 

When writers speak of the supply of commodities outrunning 
the demand, it is not clear which of two elements of demand they 
have in view; the desire to possess, or the means to purchase. In 
this uncertainty it is necessary to examine both suppositions. 

First, let us suppose that the quantity of commodities produced 
is not greater than the community would be glad to consume. Is it 
possible, in that case, that there should be a deficiency of demand, 
for want of the means of payment? Those who think so cannot 
have considered what it is which constitutes the means of payment 
for commodities. It is simply commodities. All sellers are in- 
evitably buyers. Could we suddenly double the productive powers 
of the country, we should double the supply of commodities in every 
market ; but we should also double the purchasing power. Everyone 
would bring to the market a double demand as well as supply. It is 
probable that there would be a superfluity of certain things. If so, 
the supply will adapt itself accordingly, and the values of things 
will continue to correspond to their cost of production. At any rate 
it is a sheer absurdity that all things should fall in value, and that 
all producers should be insufficiently remunerated. If values re- 
main the same, what becomes of prices is immaterial, since the re- 
muneration of producers depends upon how much of consumable 
articles they obtain for their goods. 

^* Adapted from The Principles of Political Economy, II, 105-113 (1848). 



THE BUSINESS CYCLE 243 

But it may perhaps be supposed that it is not the ability to 
purchase, but the desire to possess, which falls short ; that those who 
have the means do not make the wants, and those who have the 
wants are without the means. A portion, therefore, of the com- 
modities produced may be unable to find a market. 

This form of the doctrine is more plausible and does not involve 
a contradiction. There may easily be a greater quantity of any 
commodity than is desired by those who have the means to pur- 
chase it, and it is abstractly conceivable that this, might be the case 
with all comomodities. The error is in not perceiving that though 
all who have an equivalent to give might be fully provided with 
every consumable article which they desire, the fact that they go 
on adding to the production proves that this is not actually the 
case. Whoever brings additional commodities to the market brings 
an additional power to purchase ; he also brings an additional desire 
to consume, since if he had not that desire he would not have 
troubled himself to produce. At most, it can be argued that the 
demand may be for one thing and the supply may unfortunately 
consist of another. 

Driven to this last resort, an opponent may perhaps allege that 
there are persons who produce and accumulate from mere habit. 
They continue producing because the machine is ready mounted, and 
save and reinvest their savings because they have nothing on which 
they care to expend them. Such cases are possible; but do not 
affect our conclusion. For, what do these persons do with their 
savings ? They invest them productively ; that is, spend them in 
employing labor. Now will the laboring class also know what to 
do with it? Are we to suppose that they too have their wants per- 
fectly satisfied, and go on laboring from mere habit? Until the 
working classes have also reached the point of satiety, there will be 
no want of demand for produce. Thus, in whatever manner the 
question is looked at, the theory of general over-production im- 
plies an absurdity. 

120, Sun-Spots and Crises^^ 

BY W. STANIvEY JEVONS 

I have long felt convinced that a well-marked decennial perio- 
dicity can be traced in the activity of trade and the recurrence of 

^^Adapted from "The Periodicity of Commercial Crises and Its Physical 
Explanation," in Investigations in Currency and Finance, 207, 214-216 (1878). 



244 CURRENT ECONOMIC PROBLEMS 

commercial crises. Evidence shows that trade reached a maximum 
of activity in or about the years i/Oi, 171 1, 1721, 1732, 1742, 1753, 
1763, 1772, 1783, 1793, 1805, 1815, 1825, 1837, 1847, 1857, 1866. 
These years, whether marked by the bursting of a commercial panic 
or not, are corresponding years, and the intervals vary only from 
nine to twelve years. There being in all an interval of one hundred 
and sixty-five years, broken into sixteen periods, the average length 
of these periods is about 10.^ j^ears. But the dates 1701 and 171 1 
are not well established and the panic of 1866 was probably precipi- 
tated by the fall of Overends, Gurney & Co. Judging by the events 
of 1837, 1847, and 1857, we should probably place the proper date 
of the collapse in 1867. If "^^'^ compare the unquestionable collapse 
of 1721 with 1867, the average interval is 10.43 years; if Ave prefer 
to compare 1721 with 1857, in which year there was an undoubted 
collapse, then the mean inten-al becomes 10.46. As the year 1763 
was also a year of well-marked crisis, it is instructive to compare 
it with 1857, which gives the average inten^al just 10.44 years, 
which falls nearly between the previous results, and may be accepted 
as the most probable. Now it is very curious to bring this result 
in connection with the statement of Mr. ]. A. Brown-'' that his in- 
vestigations led him to the conclusion that the cycle for sun-spots 
was 10.45 years. His conclusion agrees with that previously ob- 
tained by Dr. Lamont. Judging by this close coincidence of results 
according to the theory of probabilities, it becomes highly probable 
that the two periodic phenomena, varying so nearly in the same 
mean period, are connected as cause and effect. 

These periodic variations in industrial activity are frequently 
attributed to mental action. A commercial panic, it is held, is the 
destruction of belief and hope in the minds of merchants and 
bankers. Though I agree, I can see no reason why the human mind, 
in its own spontaneous -action, should select a period of just 10.44 
years to vary in. Surely we must go beyond the mind to its indus- 
trial environment. Merchants and bankers are continually influenced 
in their dealings by accounts of the success of harvests, the compara- 
tive abundance or scarcity of goods ; and when we know that there 
is a cause, the variation of the solar activity, which is just of the 
nature to aft'ect the produce of agriculture, and which does vary in 
the same period, it is almost certain that the two sets of phenomena, 
credit cycles and solar variations, are connected as cause and eft'ect. 

-^Nature, XVI, 63 (1877). 



THE BUSINESS CYCLE 245 

121. The Neo-Jevonian Theory" 

BY AIvVIN S. JOHNSON 

We have no lack of theories — some of them extremely ingenious 
— setting forth the causes and conditions of crises. Most of these 
unfortunately are vitiated by a propagandist purpose. Just as the 
practical politician ascribes depression to the tariff, so the economist 
is likely to find the cause in social conditions of which he disapproves. 
Theorists who approve of the existing order on general grounds are 
disposed to assign a separate cause to each crisis. So of the outstand- 
ing fact of periodicity of crises we have hitherto had no satisfactory 
explanation. Accordingly we may regard as an event of great 
practical and scientific importance a new book on economic cycles 
by Professor Moore.^® 

The author attempts to apply the newer mathematics to the 
analysis of economic facts. For a generation or more students of 
meteorology have occupied themselves with cyclical variations in 
climate ; and these variations, affecting as they must the production 
of agricultural staples, have an obvious bearing upon economic con- 
ditions. Professor Moore has attacked the climate problem anew 
and shows that so far as rainfall is concerned — the most important 
element — the climate of our middle western agricultural territory is 
characterized by great cycles of approximately thirty-three years, 
and by lesser cycles of approximately eight years. An analysis of 
crop statistics shows that the yield per acre of staple crops correlates 
very closely with the rainfall cycles thus established. Agricultural 
prices are high in lean years and low in fat ones ; nevertheless the 
price variations are inadequate to counterbalance the variations in 
yield. Accordingly the purchasing power exerted by agriculture 
varies in cycles that are identical with the rainfall cycles. Thus 
agricultural prosperity and depression are already explained. 

Next, as to the effect on industry. Professor Moore analyzes the 
statistics of pig-iron production — the "barometer of business" — and 
finds that with due allowance for the secular upward trend in produc- 
tion, the figures reveal cycles corresponding with the rainfall cycles, 
but lagging after by an interval of about two years. Finally a study 
pf general prices — .the indicia of prosperity and depression — brings 
to light corresponding cycles, with a lag, however, of about four 

^^Adapted from "Causes of Crises," in The New Republic, II, 17-19. 
Copyright (1915). 

^^ Economic Cycles: Their Law and Cause. Published by Macmillan 
(1914). 



246 CURRENT ECONOMIC PROBLEMS 

years. Thus is established the dependence of all the complex phe- 
nomena of economic cycles upon the simple underlying phenomenon 
of the meteorological cycle. 

122. Capitalization and Crises^^ 

BY FRANK A. Fi;TT£;R 

Capitalization runs through all industry. The value of every- 
thing that lasts for more than a moment is built in part upon in- 
come which is not actual, but expectative, whose amount, there- 
fore, is a matter of guesswork, or speculation. Many unknown 
factors enter intO' the estimate of future incomes. The universal 
tendency to rhythm in motion manifests itself in an overestimate or 
underestimate of income. Most men follow a leader in investment 
as in other things. The spirit of speculation grows until it becomes 
almost a frenzy and people rush toward this or that investment, 
throwing capitalization in some industries far out of equilibrium 
with that in others. 

The use of credit enhances the rhythm of price. A large part of 
business is done on margins. If the value of a thing fully paid for 
falls in the hands of the owner, he alone loses ; but, if the value 
O'f a thing only partially paid for falls sO' much that the owner is 
forced to default in his payment, the loss may be transmitted along 
the line of credit to every one in the series O'f transactions. A 
credit system, highly developed, is a house of cards at a time of 
financial stress. There is an element of credit in almost all busi- 
ness. Entrepreneurs enter intO' strenuous rivalry to secure the 
profits of a rise, ever hoping to get out whole before the crisis 
comes. 

The fundamental cause of crises thus is seen to be psychological ; 
it is the rhythmic miscalculation of incomes and of capital value, 
occurring to some degree throughout industry. This is given full 
opportunity for action only when certain favoring objective con- 
ditions are present. Most noteworthy of these is the dynamic con- 
dition of industry. The past century has opened up new fields of 
investment on an unexampled scale. New machinery and processes 
have given undreamed oi opportunity for enterprise. Such factors 
disturb the equilibrium Oif prices both in time and space, give a 
powerful stimulus towards higher values, and stimulate the hopes 
of all investors. When the balance between the capitalization of 

^"Adapted from Principles of Economics, 353-354. Copyright by the 
Century Co. (1904). 



THE BUSINESS CYCLE 247 

various industries and between the income of various periods proves 
to be false, the inevitable readjustment causes suffering and loss to 
many, but particularly in the inflated industries. But, because of 
the mutual relations of men in business, few even of those who have 
kept freest from speculation can quite escape the evils. 

123. The Lagging Adjustment of Interest^" 

BY IRVING FISHER 

Few persons realize how central a role interest plays in all 
business phenomena. Interest is the link connecting each year with 
the next. Every plan and contract involving time must be made 
partly in terms of the rate of interest, even though this rate enters 
unperceived. We have several billions of dollars invested today in 
the life insurance business. The whole structure has been calculated 
by assuming a law of human mortality and a rate of interest. A 
change of one point in the rate of interest makes an enormous change 
in all these calculations. The value of all lands, all capital, all securi- 
ties, depends upon the rate of interest. The importance, therefore, 
of having the rate properly adjusted cannot be too much emphasized. 
To show the necessity of an adjustment to meet a new situation let 
us take an example. If in 1896 it had been believed that Bryan was 
to be elected, that his program was to be carried out, and that in 
consequence there was to be enacted a veritable "50-cent dollar," it 
would have been necessary to increase the rate of interest by an 
amount equal to a sinking fund for the 50 per cent depreciation. In 
like manner it is always necessary for self-protection to raise the 
interest rate to guard against any foreseen depreciation. 

To offset such depreciation the business man does not actually 
have to call it by that name. Instead of considering gold as chang- 
ing in value, he may consider commodities as changing in terms of 
gold; and instead of talking of depreciation of gold, he may speak 
of rise of prices. The business man who believes that prices in 
general will rise in the next ten years believes in effect that the value 
of gold will fall. He will be likely to take this fact into account in 
connection with every business venture or investment. The result 
will inevitably be a rise in the rate of interest. If, for instance, he is 
a bor,rower, rising prices will mean to him rising profits, and he will 
be much more ready than if prices were falling to pay high interest. 
On the other hand, to be tempted to lend money, he will require 
higher interest to insure his receiving an equivalent of the purchasing 

f Adapted from "Gold Depreciation and Interest Rates," in Moody's 
Magazine, VII, 110-114. Copyright (1909). 



248 CURRENT ECONOMIC PROBLEMS 

power loaned. There is thus provided a certain escape from the 
evils attending a foreknown change in the value of money. 

Unfortunately, however, the great mass of persons do not con- 
sider the prospect of a change in the general level of prices. An 
investigation seeking to determine to what extent a rise in prices is 
actually discounted and offset shows : first, that in general when 
prices are rising, the rate of interest is high and therefore does to a 
certain extent compensate for the fall in the principal, but second, 
it is not usually high enough fully to compensate for this deprecia- 
tion. In other words, it is only partially adjusted. 

This lack of adjustment implies a transfer of the ownership of 
wealth from the- creditor to the debtor. The investor who is shrewd 
enough to foresee the rise in prices will bond his business at the 
current rate of interest. Since this rate is lower than his business 
could afford to pay, the enterpriser wins at the expense of the bond- 
holder. He will borrow more than he otherwise would because the 
rate of interest is lower than it should be. The borrowing class 
today consists of the enterprisers — precisely the men who have the 
greatest foresight — consequently it is the borrower, not the lender, 
who first foresees a rise or fall of prices. If the lender foresaw 
equally he would demand a higher rate of interest when prices are 
rising. An adequate adjustment of interest would prevent this ex- 
tensive borrowing, but, because of an inequality of foresight, a rise 
of prices will stimulate loans. 

This is the analysis of the universally observed fact that during 
a period of rising prices loans are unduly stimulated. For a time 
larger profits are made simply because part of the lender's share goes 
to the borrower, and this continues until the rate of interest at last 
becomes sufficiently adjusted to check the loans. 

A crisis is the cumulation of a period of rising prices. In the 
mechanism of this process, however, the main role is played by the 
rate of interest. The series of events is, I believe, in general as 
follows : 

First, a rise in prices through any cause, such as an increased 
production of gold. 

Second, failure at first of the rate of interest to rise enough to 
offset the impending fall in the value of money (rise in prices). 

Third, borrowers are quicker to grasp the situation than lenders, 
and consequently loans are unduly extended. 

Fourth, the increase of loans is accompanied by an increase of 
bank deposits. 



THE BUSINESS CYCLE 249 

Fifth, since bank deposits act as a substitute for money, an in- 
crease of bank deposits tends further to increase prices. 

In other words, as a result of this chain of causes, beginning with 
a rise in prices, the prices will rise still further. There is thus set 
up a vicious circle, which will continue just as long as the rate of 
interest fails to make a proper adjustment to put on the brakes and 
prevent the over-borrowing. It is odd that when the crisis comes the 
blame is put on the high rate of interest, in utter disregard of the 
fact that if the rate of interest had been higher at first, the crisis 
would have been averted. 

H. CREDIT AND CRISES 
124. Inelasticity of Credit under the National Banking System 

BY HAROLD G. MOUIvTON 

The financial crisis is marked by an enormous demand upon the 
banks for funds. Many business men, finding that debts due them 
are not being paid at maturity, become, in consequence, unable to 
meet their own maturing obHgations. The result is a rush to the 
banks for loans with which to tide themselves over the crisis. Many 
other business men, who merely fear that their debtors may not be 
able to pay promptly, also rush to the banks for an accommodation 
in anticipation of trouble to come. It is usually feared that a little 
later loans may be procured only at a very high rate, if at all ; and 
that, in any event, an immediate loan insures financial safety and 
peace of mind to the worried business man. 

Under the recently superseded national banking system, sound 
banking practice, as well as the law, required national banks to keep 
a reserve in cash against their obligations which were payable on 
demand. For instance, in the big financial centers, a reserve of 25 
per cent was required. That is, if the bank had made loans to the 
extent of $1,000,000 and had given depositors checking (deposit) 
accounts against which they might draw as desired, it would have to 
hold in cash a reserve of at least $250,000. To illustrate the situation 
that develops in time of crisis, let us assume the above bank to have 
a reserve of $275,000, or 27.5 per cent, and that at the time of crisis 
there arises a demand for $100,000 of additional loans to business. 
This would make the deposit accounts equal to substantially $1,100,- 
000, without causing any change in the reserve ; and the result would 
be a reduction in percentage of reserves to deposits from 27.5 to 25 



250 CURRENT ECONOMIC PROBLEMS 

per cent, the legal minimum. The situation is usually rendered still 
more acute by reason of the fact that many depositors, fearful of the 
safety of the banks, withdraw and hoard cash. If we assume 
$50,000 to be withdrawn in this way, the reserve is reduced to 
$225,000 which, of course, further reduces the ratio of reserve to 
deposits, specifically to about 21.5 per cent. This double strain upon 
the banks thus quickly carries them to a point where inability to 
maintain specie payments and consequently insolvency is imminent. 

Thus far we have spoken of a demand on the banks for funds or 
loans, using these terms in a general sense. It is now necessary to 
clarify the situation by stating that the demand of the business world 
is partly for credit in the form of checking accounts, and partly for 
actual money in the form of bank notes. The latter appears to the 
average person as the all-important, if not the sole, function. Scar- 
city of money is what the man of small means whose transactions are 
generally of a retail nature sees. This is of course a scarcity of 
available funds due to the hoarding that has taken place; but a 
scarcity of credit, of the ability to procure checking accounts which 
can be drawn against in making payntents, is of far greater moment. 
The total demand for deposit or check currency is many times as 
great as the demand for money or bank-note currency. 

Under the national banking system it was practically impossible 
for the banks to expand materially either their note issues or their 
deposit currency in time of crisis. To issue notes a bank had first to 
expend cash to a greater amount in the purchase of government 
bonds to secure the value of the notes to be issued. Moreover, it was 
usually extremely difficult to secure the bonds required. The note 
issue, accordingly, was very inelastic. 

While deposit currency could be expanded as long as the reserves 
were plentiful, the necessary expansion incident to the crisis could 
not be met. Replenishment of reserves is absolutely essential to an 
extensive expansion of deposit currency. But the banks were unable 
to increase their reserves. Normally a bank might be expected to 
do in time of stress what an individual does, namely, sell or pledge 
as security for a loan more of its available assets or property. But, 
except in a limited way through the agency of clearing-house asso- 
ciations, there was no means by which the banks could convert their 
assets into cash. Our national banking system was decentralized 
and non-co-operative ; and in time of trouble each bank endeavored 
to save itself regardless of others, with the devil taking the hindmost. 
There was no central agency or institution to which banks that were 
hardpressed could turn for accommodation. Credit or deposit cur- 
rency was therefore almost as inelastic as bank-note currency. 



THE BUSINESS CYCLE 251 

125. How a Panic Was Averted in 1914^^ 

It is possible that there have never been two months in the history 
of the United States since the Civil War when so many and such 
far-reaching financial and commercial problems were presented as 
have been offered during August and September of this year. Be- 
ginning with the sudden outbreak of the war, drastic and unpre- 
cedented fluctuations in securities, cotton, chemicals, and other 
commodities were witnessed. They were accompanied by a suspen- 
sion of practically all communication with outside countries, due to 
the unwillingness of shipowners to continue the operation of their 
vessels from fear of capture. The total annihilation of export trade 
for the time being, as well as the partial destruction of import busi- 
ness, produced serious financial and labor difficulties in the United 
States. At the basis of the whole situation lies the financial problem 
that was forced to the front by the declaration of war. 

Hardly had the actual outbreak of the war become known when 
the closing of the European exchanges gave the signal for similar 
action in the United States. On August i, the New York Stock 
Exchange closed its doors, and this example was shortly followed by 
the cotton and cofifee exchanges, and by the Consolidated Stock Ex- 
change. The immediate reason for the closing of the New York 
Stock Exchange was twofold: (i) Europeans, foreseeing a tre- 
mendous draft on their resources, hastened to sell investment securi- 
ties in the only great market untouched by war. To this end 
European holders of American stocks and bonds cabled their bankers 
in New York to dispose of securities at practically any price. This 
process was in operation during the days before the closing of the 
Exchange and had already caused heavy shipments of gold to Europe. 
Had it been allowed to continue, it would have, alrruost certainly, 
deprived the United States of a very large proportion of its gold 
stock; (2) Stock Exchange operators who had obtained bank loans 
protected by collateral security saw that the reduction of prices on 
the Exchange which would necessarily ensue would effectually "wipe 
them out," while the banks which were "carrying" these persons 
understood that, if obliged to "call" the loans thus made, they would 
still further aggravate the pressure of selling orders and would 
bring about widespread ruin in the financial world. 

The confessed closing of the exchanges, because of the danger 
of loss of gold and of depreciation of prices, naturally tended to 
arouse serious alarm in many minds, and withdrawals of cash both 
from the banks and from the Treasury began to be heavy. Almost 

^^Adapted from "Washington Notes," in the Journal of Political Economy, 

XXII, 791-793 (1914)- 



252 CURRENT ECONOMIC PROBLEMS 

simultaneous with this condition was the declaration of a so-called 
"moratorium" by most of the principal countries of Europe. This 
prevented Americans who had maturing European claims from 
collecting the amounts due them until a later date than they had 
expected. Hence such persons were compelled to draw more heavily 
upon their home bank accounts and so far as possible finance them- 
selves through fresh loans at the banks. Fearing the heavy draft 
on their resources that was thus threatened, the New York banks 
almost immediately had recourse to the "national currency associa- 
tion" which had been organized after the adoption of the Aldrich- 
Vreeland Act.^^ Other banks promptly took like action. Applications 
were at once made to the government for the issue of emergency 
currency, and it was resolved also to employ an issue of clearing- 
house certificates. Both of these methods were sanctioned by the 
government on August 2, and on the following day the work of 
issuing the certificates and notes was actively begun. It was found, 
however, that the Aldrich-Vreeland Act placed some serious 
obstacles in the way of an easy issue of currency. In consequence a 
bill for the relief of this state of things was introduced in Congress 
and was signed by the President on August 4. This amendatory act 
reduced the tax on Aldrich-Vreeland notes for the first three months 
of their circulation to 3 per cent and raised the limit of issues to 125 
per cent of capital and surplus. While no public announcement was 
made of the issue of clearing-house certificates, it is known that in 
both New York and elsewhere an enormous amount of such certifi- 
cates were issued. The emergency currency taken out under the 
amended legislation already referred to expanded so rapidly that by 
the opening of September more than $250,000,000 of it had been 
issued. The emergency currency was freely accepted by individuals, 
and banks in New York as well as elsewhere adopted the policy of 
paying it out whenever possible while holding gold. Thus the 
financial stringency was narrowly averted. 

^-The Aldrich-Vreeland Act of May 30, 1908, attempted to create an 
elastic currency for use in emergencies. It provided for the formation of 
"national currency associations"" by ten or more national banks having an 
aggregate capital of $5,000,000. Upon application of one of these associa- 
tions, the Comptroller of the Currency, with the approval of the Secretary 
of the Treasury, was permitted to issue circulating notes not to exceed 75 
per cent of the commercial paper or go per cent of the state, county, and 
municipal bonds which were required to be deposited with the Treasury as 
security. The total of additional notes for the entire country was not to 
exceed $500,000,000. A tax of 5 per cent per annum for the first month 
was imposed upon the issue of these notes. An additional tax of i per cent 
per annum was imposed for each month until a tax of 10 per cent per 
annum was reached. — Editor. 



THE BUSINESS CYCLE 253 

126. Provisions for Elasticity in the New Currency Act°^ 

BY L. M. JACOBS, JR. 

The new banking system of the United States, as provided in the 
Act of December 23, 1913, has as its central feature the establish- 
ment of twelve Federal reserve banks,^* under the control of a 
Federal Reserve Board appointed by the President. The United 
States is to be divided into twelve districts, in each of which a city 
is to be designated as a Federal reserve city. National banks are 
required and state banks, under certain conditions, are eligible, to 
become members of regional reserve bank associations. 

The Federal Reserve Board is to be the dominant factor in the 
new banking system. It consists of seven members, the Secretary 
of the Treasury, the Comptroller of the Currency, and five persons 
appointed by the President, with the approval of the Senate. Two 
of the five are to be experienced bankers. The regular term of these 
members is ten years. This Board is to have, within the law, general 
supervision of the banking system. The functions of the Federal 
Advisory Council, composed of representatives from the Federal 
districts, is largely advisory. 

Each Federal reserve bank is to have nine directors, three selected 
by the Federal Reserve Board, and six elected by the member banks. 
They are authorized to receive from member banks deposits of cur- 
rency or cheques and drafts upon solvent member banks payable on 
presentation. 

Upon the indorsement of any of the member banks any Federal 
reserve bank may discount notes, drafts, and bills of exchange aris- 
ing out of actual commercial transactions. The Federal Reserve 
Board is to have the right to determine the character of the paper 
thus eligible for discount. Paper to be admitted to discount must 
have a maturity of not miore than 90 days, except that paper growing 
out of agricultural transactions with a maturity not exceeding six 
months may be discounted in limited amounts. No limitation is 
placed upon the amount of rediscounts a Federal reserve bank may 
handle for a member bank, but the rediscounts are to be subject to 
such restrictions as may be imposed by the Federal Reserve Board. 

Each Federal reserve bank is authorized to establish from time 
^-4;o time, subject to the review of the Federal Reserve Board, the 

^''Adapted from "The Federal Reserve Law of the United States of 
America," in Journal of the Institute of Bankers^ XXXV, 250-259 (1914). 

^*The act as passed provided for a minimum of eight and a maximum 
of twelve regional reserve banks. The organization of the system has 
proceeded on the basis of twelve. 



254 CURRENT ECONOMIC PROBLEMS 

rate of discount to be charged for each class of paper, which shall be 
fixed with a view to accommodating commerce and business. 

The law provides that every Federal reserve bank shall maintain 
reserve in gold or lawful money of not less than 35 per cent against 
its deposits, and reserves in gold of not less than 40 per cent against 
its Federal reserve notes in actual circulation. The Federal Reserve 
Board, however, is empowered to suspend, for a period not exceeding 
thirty days, any reserve requirement in the act. It can also renew 
such suspensions for periods not exceeding fifteen days each. How- 
ever, a graduated tax is to be established upon the amounts by which 
the reserve requirements may be permitted to fall below the specified 
level. When the reserve falls between 40 and 32^ per cent, the tax 
is not to be more than i per cent upon such deficiency ; if the reserve 
falls below the latter figure, the tax is to be not less than i^ per cent 
upon each 2^ per cent or fraction below 323^ per cent. Banks in 
central reserve cities are required to maintain a reserve of 18 per 
cent of their demand deposits and 5 per cent of their time deposits. 
Banks in cities of the second class are required to keep 15 per cent 
of demand deposits and 5 per cent of time deposits. Country banks 
are required to maintain 15 per cent reserve against all deposits. 

The act authorizes the issuance of Federal reserve notes at the 
discretion of the Federal Reserve Board for the sole purpose of 
making advances to the Federal reserve banks. These notes are to 
be obligations of the United States and to be receivable by all national 
and member banks and for all taxes. They are to be redeemed in 
gold on demand at the Treasury Department or in gold or lawful 
money at any Federal reserve bank. Any Federal reserve bank may 
make application for such amount of Federal reserve notes as it may 
require, the application to be accompanied with a tender of collateral 
equal to the amount of notes applied for. This collateral is to be 
comprised of notes and bills acceptable for rediscount. The Federal 
Reserve Board may at any time call upon the Federal reserve bank 
for additional security to protect the notes issued to it. 

Each Federal reserve bank is to maintain reserves in gold of not 
less than 40 per cent against its Federal reserve notes in actual circu- 
lation. Not less than 5 per cent of the gold reserve held by a Federal 
reserve bank to protect the notes outstanding must be deposited with 
the Treasurer of the United States, and further amounts may be 
called for. 

The Federal Reserve Board is given the right to accept or reject 
in whole or in part the application of any Federal reserve bank for 
Federal reserve notes, but to the extent that such application may be 
granted the Federal Reserve Board will supply Federal reserve notes 



THE BUSINESS CYCLE 255 

to the bank so applying. The bank will be charged the amount of 
the notes and will pay such rates of interest as may be established 
by the Federal Reserve Board. 

When Federal reserve notes are issued to a Federal reserve bank 
they will have printed on their face a distinguishing number by which 
Federal reserve banks will be known, and it is made unlawful, 
subject to a penalty of 10 per cent of the amount, for any Federal 
reserve bank to pay out the notes of any other Federal reserve bank. 
Notes of other Federal reserve banks received by a Federal reserve 
bank are to be promptly forwarded for credit or redemption to the 
issuing bank. 

127. Emergency Elasticity of Credit 

BY HAROLD G. MOULTON 

Emergency elasticity of credit and loans will be secured under 
the currency system through what is known as rediscounting com- 
mercial paper. 

Suppose the First National Bank of Joliet should, when the 
country is face to face with a crisis, find itself confronted with a 
heavy demand for commercial loans. This means that a large number 
of business concerns wish to borrow on their promissory notes, and 
receive a deposit account against which they can draw checks to 
meet current payments. It will be remembered that a bank must 
keep a certain percentage of cash reserves to deposits. Suppose now 
the cash of this bank is at a minimum, and that, if it makes further 
loans on commercial paper, the reserves will fall below the legal 
requirement. Under the old system the bank would have had to 
refuse the loans to the detriment of legitimate business enterprise. 
But under the new law the Joliet bank is enabled to increase its 
reserves, and thereby enlarge its loaning capacity by rediscounting 
some of the promissory notes in its possession with the Federal 
Reserve Bank in Chicago. Let us make this matter of rediscounting 
clear. 

When John Jones needs money he may take a note for $1,000 
that he holds against William Wilson to his bank in Joliet and sell 
it to the bank for cash. The bank will give him $1,000 minus interest 
for the time the note has yet to run. What the Joliet bank does for 
John Jones is precisely what the Federal Reserve Bank in Chicago 
will do for the First National Bank of Joliet. When this bank needs 
cash it can take this note which it has discounted and have it dis- 
counted by the Federal Reserve Bank. The Joliet bank will get 
$1,000 less the interest for the short time the note still has to run. 



256 CURRENT ECONOMIC PROBLEMS 

This second discount is what is known as a rediscount. The Federal 
Reserve Banks are, therefore, bankers' banks, and they do for the 
individual member banks precisely what the individual banks do for 
their customers generally. This ability to convert* paper into cash 
and thereby increase its reserve enables the Joliet bank to extend 
loans to its customers even under severe financial pressure. 

Suppose that a bank in a rural community in the Chicago district 
finds, in the face of an emergency, that there is a heavy demand for 
loans in the form of bank notes. How can the increased quantity 
of notes be obtained? Under the new law elasticity of note issue is 
gained by permitting the issue of notes secured by commercial paper 
or bank assets. The country bank desiring to issue more notes sends 
some of the promissory notes of customers to the Federal Reserve 
Bank in Chicago for rediscount. The latter may upon this paper as 
security have printed new bank notes and send them' to the country 
bank. This gives an elastic bank-note currency because the demand 
for more money itself brings into existence the commercial paper 
that is to be the security for the new notes. A farmer, for example, 
wants money with which to pay his laborers. So he gives his banker 
a promissory note, which is secured by the crops soon to be marketed. 
His banker rediscounts the promissory note and turns the necessary 
bank notes over to the farmer. But when the need is passed this 
currency is contracted. The farmer sells his crops and pays his 
promissory note at the bank. The bank now pays these notes over 
to the Federal Reserve Bank in Chicago to meet the obligation which 
had resulted from the rediscount. Bank notes equal in quantity to 
the amount issued have now come back to the place of issue. The 
payment of the obligation which brought them forth has automatic- 
ally retired them. 

By these means panics can be substantially checked if not pre- 
vented altogether. In the face of a heavy pressure of loans at a 
time of crisis, any bank can avail itself of the process of rediscount- 
ing. This enlarges the loaning power of the banks, makes it possible 
for legitimate business concerns to secure bank accommodations 
when needed, and thereby prevents failures. A business which is 
unsound or mismanaged is not entitled to and cannot obtain loans 
from a bank. It deserves to fail, and its early failure will be dis- 
tinctly beneficial. But the business concern which is fundamentally 
sound and well managed ought to be able to secure banking accom- 
modations. The new currency law permits this; and at the same 
time the ability of the banks to provide more currency and to expand 
loans enables banks to meet all obligations, forestall runs, and escape 
failures. 



THE BUSINESS CYCLE 257 

128. Emergency Elasticity of Note Issue^^ 

BY FRED M. TAYLOR 

From the beginnings of agitation for currency reform the advo- 
cates of elasticity have recognized more or less clearly two kinds : 
(i) that which we may call seasonal or ordinary elasticity, and (2) 
that which we may call emergency elasticity. By the latter is meant 
the power of a note issue to adjust its volume to those extraordinary 
changes in need which connect themselves with the typical banking 
panic. 

Passing over the question of the adequacy of the new note issue 
in respect to seasonal or ordinary elasticity, let us consider its 
adequacy in respect to emergency elasticity. Broadly speaking, it is 
certain that at this point the new law will get a fairly favorable 
verdict. The banking panic, when fully developed, gives rise to 
three difficulties and to three needs : ( i ) funds to relieve the ante- 
cedent stringency which threatens a complete collapse of the credit 
structure; (2) a circulating medium for ordinary financial trade 
when a general suspension of payments by the banks has brought on 
a money famine; and (3) a prompt and thoroughgoing contraction 
of the circulation in the depression which follows the panic. 

There can be doubt that under the new law the availability of an 
issue sufficient in volume instantly to relieve the antecedent strin- 
gency, and so to put a stop to the panic before it has developed to 
serious proportions, is assured. In fact it is not at all improbable 
that the new reserve banks will be able to check the development of 
such a panic at the very outset without increasing at all their note 
issues. But, if this does not prove true, there seems no doubt that 
the new system will insure the forthcoming of such currency both of 
a quality and in a quantity which will be fully adequate for the task 
put upon it. (i) The notes to be issued, being obligations of the 
Federal Treasury, will be as acceptable as gold even on the eve of a 
panic. (2) There is no limit to the absolute amount of these notes. 
(3) The practical limit set by the requirement that discounted paper 
shall be furnished as the basis for their issue is of no real signifi- 
cance, since such paper will undoubtedly be vastly greater in volume 
than any need which could arise. 

Let us pass to the second need which is to be met, that of an ordi- 
'nary circulating medium for trade when banks have by common 
consent suspended payment. In the first place, if we are right in 
supposing that the new law will prevent any panic from reaching 

^^Adapted from "The Elasticity of Note Issue under the New Currency 
Law," in the Journal of Political Economy, XXII, 454, 460-463 (1914). 



258 CURRENT ECONOMIC PROBLEMS 

such a degree of intensity, it is obvious that we shall not have occa- 
sion to meet this particular difficulty. If, however, this does not 
turn out to be correct, if panics can still go so far as to suspend 
payments, as to hold on to every form of reasonably solid money, 
and as to try to satisfy the public with substitutes, our verdict for 
the new currency will be less favorable. The new law does little 
or nothing to relieve such a situation. Broadly speaking, the new 
money will be altogether too good to meet this particular need. Banks 
that had reached a stage of panic sufficiently intense to cause them 
to suspend payment would be sure to hoard money as good as these 
notes are bound to be. The new issue would immediately pass into , 
hoards and, therefore, would bring little if any relief to the currency 
famine which had developed. In fact it is almost impossible to con- 
ceive any form of note fitted to this particular task except one so bad 
that there was no danger of its being hoarded. The only proper way 
to meet this particular need is to make sure that it does not rise at all. 
We come finally to the third need which is to be met, that of a 
prompt and general contraction of the circulation when the panic has 
passed and the inevitable business depression consequent upon such 
a panic has set in. Here again, though not in the same degree as in 
the last case, if the new law proves as successful as anticipated, the 
need in question will be little experienced. We shall usually escape 
the extreme business inflation of the ante-panic period; the panic 
itself will be much abated, if not completely eliminated ; and, in 
consequence, the trade reaction which naturally follows a panic will 
be much diminished in intensity. Yet, it can hardly be doubted that, 
after even an incipient panic, there will be some reaction, and conse- 
quently a more or less plethoric condition of the currency will follow. 
Will the new issue have sufficient contractility to meet the need? 
In general the conditions attached to the new issue are not favorable 
to contractility. They do not provide for either the prompt driving 
home or the prompt drawing home of the notes when the necessity 
for their issue is past. Outsiders lack adequate motives for sending 
these notes home; issuers lack adequate motives for calling them 
horne. The case for emergency contractility is, however, strength- 
ened by one or two peculiar conditions. First, it is probable that 
the homing power of the note will prove greater at such a time than 
in an ordinary year, for, at such a time, outside banks will not be 
able to find investments for their funds, since speculative trading 
will disappear and business generally will be at a very low ebb. 
Again, it seems that the issuing bank will, in this case, have more 
than the usual motive for bringing about a contraction of the circula- 
tion. In ordinary times a bank will gain more by using the funds in 



THE BUSINESS CYCLE 259 

its possession to make loans rather than to retire notes, assuming 
that the interest charge made by the Federal Reserve Board is not 
placed excessively high. Consequently banks will not be eager to 
retire their own notes. But, in the depression that follows a panic, 
no reserve bank will have opportunity for keeping all its funds busy; 
and since in this case the interest charge, however small, will be a 
dead loss, the bank will have adequate motive for effecting, as 
promptly as possible, an adequate contraction of its note liabilities. 
This motive would be still further strengthened if the glut proved 
sufficient to cause a decided drain of gold, since, in that case, the 
reserve banks will find difficulty in maintaining the required 40 per 
cent reserve. On the whole, then, we seem warranted in affirming 
that, as respects emergency elasticity, the new notes will give no 
serious disappointment. 

I. CONTROL OF THE INDUSTRIAL CYCLE 
129. Panic Rules for Banks^^ 

BY WALTER BAGEHOT 

In time of panic, advances, if they are to be made at all, should 
be made so as, if possible, to obtain the object for which they are 
made. The end is to stay the panic ; and the advances should, if 
possible, stay the panic. And for that purpose there are two rules : 

First. That these loans should be made only at a very high rate 
of interest. This will operate as a heavy fine "on unreasonable timid- 
ity, and will prevent the greater number of applications by persons 
who do not require it. The rate should be raised early in the panic, 
so that the fine may be paid early; that no one may borrow out of 
idle precaution without paying well for it ; that the banking reserve 
may be protected as far as possible. 

Secondly. That at this rate these advances should be made on 
all good banking securities, and as largely as the public asks for them. 
The reason is plain. The object is to stay alarm, and nothing, there- 
fore, should be done to cause alarm. But the way to cause alarm is 
to refuse someone who has good security to offer. The news of this 
will spread in an instant through all the money markets at a moment 
of terror; no one can say exactly who carries it, but in half an hour 
it will be carried on all sides, and will intensify the terror every- 
where. No advances indeed need be made by which the banks v/ill 
ultimately lose. The amount of bad business in commercial coun- 
tries is an infinitesimally small fraction of the whole business. That 

^* Adapted from Lombard- Street, loth ed., 199-200 (1873). 



26o CURRENT ECONOMIC PROBLEMS 

in a panic the banks should refuse bad bills or bad securities will not 
make the panic worse ; the "unsound" people are a feeble minority, 
and they are afraid even to look frightened for fear the unsoundness 
will be detected. The great majority, the majority to be protected, 
are the "sound" people, the people who have good security to offer. 
If it is known that the banks are advancing on what in ordinary times 
is reckoned good security, the alarm of the solvent merchants and 
bankers will be stayed. But if securities really good and usually 
convertible are refused by the banks, the alarm wih not abate, the 
other loans made will fail in obtaining their end, and the pamic will 
become worse and worse. 

130. The Part of Individual Responsibility^^ 

BY THEODORE E. BURTON 

The only sure remedy for these periods of depression is that sug- 
gested by Lord Beaconsfield, "the alchemy of patience." The de- 
pression is a condition that must be recognized and met ; any attempt 
to ignore it or to indulge in confidence when there is no ground for 
it will only involve further disaster. A cure cannot be hastened 
except by the best of care and the co-operation of the patient. At 
the same time there is every ground for confidence in the ultimate 
recovery. 

Too much confidence must not be placed in the action of govern- 
ment. Just as good laws and effective administration are rather 
essentials of prosperity than creative of it, so also they are more 
potent in preventing depressions than in remedying them. So far as 
human agency is concerned, intelligent individual action must do the 
most. 

Upon the individual as investor hangs a heavy responsibihty. He 
should follow rules enjoining prudence and careful calculation, par- 
ticularly that of Professor Jevons : "In making investments it is 
foohsh to do what other people are doing, because there are always 
sure to be too many people doing the same thing." Were this 
heeded, investments would distribute themselves more evenly, caus- 
ing industry to pursue a steadier course. 

In the same connection is a rule worthy of consideration — 
namely, to be careful about investing in undertakings from which an 
exceptional return has been realized. Profits in all enterprises tend 
toward equality. After making due allowance for the skill and trust- 
worthiness required, risk incurred, and regularity of employment, 

"Adapted from Financial Crises, 267-269. Copyright by D. Appleton & 
Co. (1902). 



THE BUSINESS CYCLE 261 

investments afford approximately the same profit. If there is an 
exceptional return from any line of investment, it is almost certain 
that the business will be overdone. 

Divers suggestions might be made upon the necessity for higher 
standards of honesty and better education. But these are obvious 
enough, and their attainment must be worked out in lines other than 
economic. 

Many, discrediting the ability of individuals to work out their 
own salvation, have proposed the construction of public works in 
times of depression. The danger of this is that people will fall into 
the fallacy of working for the sake of working, and will not appre- 
ciate the fact that work is valuable only in case it produces some- 
thing of utility. A definite market value is a trustworthy guide to 
utility which is absent in such cases. There is the further danger 
that as numerous laborers are withdrawn from their usual lines of 
employment to engage in public work, they will, when times have 
improved, be unable or unwilling to return to their former employ- 
ments, and thus the productive power of the country will be crippled. 
It is true, however, that municipalities and states are greatly bene- 
fited by certain improvements which are of permanent value, and to 
which capital may appropriately be applied, such as good roads, 
better sewers, paved streets, etc. At a tirrie when materials are low 
and labor is unemployed, these improvements may profitably be 
made, provided they are carefully considered with a view to their 
permanent value, and not merely with the object of giving employ- 
ment. 

In short, education and experience must lead to a more intelligent 
direction of productive energy. Patient, well-directed effort must 
meet the problems presented by changes from year to year. It is 
best not to depend upon the government of any country for relief, 
but upon the individual action of its citizens. There is much founda- 
tion for the saying of Jeremy Bentham: "Industry and commerce 
ask of the state that which Diogenes asked of Alexander, 'Keep out 
of my sunshine.' " 

131. Bettering Business Barometers"^ 

BY WESLEY C. MiTCHEEIv 

The American man of affairs who seeks to keep informed about 
the trend of business conditions relies upon the financial columns of 
his daily paper, one or two of the financial weeklies, and a special 

^^Adapted from Business Cycles, 591-595- Copyright by the author 
(1913). Published by The University of California Press. 



262 CURRENT ECONOMIC PROBLEMS 

trade journal. The data which he can compile from these sources 
cover a considerable range. 

Commodity prices at wholesale are represented by actual quota- 
tions and by index numbers like Bradstreet's. The prices of loans on 
call and on time for thirty days to six months are reported for New 
York, together with the market and bank rates in London, Paris, and 
Berlin. The prices of securities are published in detail, and to show 
the general trend of the market there are convenient records, such as 
the Wall Street Journal's average of twenty railway and twelve in- 
dustrial stocks: 

Fluctuations in the volume of business must be estimated from 
various sources : bank clearings, railways' gross earnings, number of 
idle cars, imports and exports, coal, copper, pig-iron and steel output, 
shipments of grain, live stock, etc. Government crop reports help to 
forecast the probable state of trade in various agricultural sections. 
Quite helpful are the reviews of business conditions in different pa- 
pers. 

Information about the currency is supplied by the official esti- 
mates of the monetary stock, by reports of gold imports and exports, 
by the recorded movements of money into and out of the New York 
banks, and by the figures concerning the production and industrial 
consumption of gold, and the distribution of money between the 
banks and the public. Regarding the banks there are telegraphic 
statements from the central institutions of Europe, as well as a va- 
riety of domestic reports from clearing-house and national and state 
banks. 

Some idea of the volume of investment and speculation going on 
may be obtained from the transactions of the New York Stock Ex- 
change, the number of building permits granted, the mileage of rail- 
way under construction, etc. 

Last and most important, the prospects of profits are best shown 
for the railways, whose gross and net earnings are regularly pub- 
lished. The earnings of the United States Steel Corporation prob- 
ably stand second in general esteem. Then comes a mass of infor- 
mation supplied by the reports of large corporations engaged in 
mining, manufacturing, banking, etc. The other side is shown by 
the statistics of bankruptcy compiled weekly by two great mercantile 
agencies. 

Though far from complete, this list of materials is far too long 
for the average business man. To compile and analyze the available 
data requires more time, eflfort, statistical skill, and analytical ability 
than most men have for the task. Hence the typical individual skips 
the bewildering evidence and reads only the summary conclusions 



THE BUSINESS CYCLE 263 

drawn by the financial editor. That the studying of business barome- 
ters and the forecasting of business weather has become a profitable 
business affords convincing proof of the need and difficulty of using 
effectively the available materials. It is from such specialists that 
we may expect the improving and disserriinating of the information 
required as a basis for perfecting social control over the workings 
of the money economy. 

Professional forecasters do not find the data at hand too elab- 
orate. What they most need to improve their forecasts is more ex- 
tensive and more reliable materials to work upon. But it is also 
quite possible to better the use they make of the data already avail- 
able. 

Among the most needed additions to the list of business barom- 
eters are the following : 

A general index number of the physical volume of trade could 
be made from data showing the production of certain staples, the 
shipment or receipts of others, the records of foreign commerce, 
etc. Much material for this purpose is already incidentally provided 
in official documents. Separate averages should be struck for the 
great departments of industry, since the difference between the rela- 
tive activity in different lines would often be not less significant than 
the computed changes in the total. 

The proposed plan for obtaining reports concerning the volume 
of contracts let for construction work and the percentage of work 
performed on old contracts merits careful consideration. Few sets 
of figures would give more insight into business conditions when 
prosperity was verging toward a crisis or when depression was en- 
dangering prosperity. 

An index number of the relative prices of bonds and corre- 
sponding figures showing changes in interest rates upon long-time 
loans would not be difficult to prepare. Even if standing alone these 
two series would possess great value as reflecting the attitude of 
investors ; but they would be still more useful if accompanied by 
data concerning the amounts of bonds and short-term notes put 
upon the market by business enterprises and by governments. 

Certain states have made a beginning in providing statistics of 
unemployment. But we have no comprehensive data of this kind. 
Their value, not only as an index of welfare among wage-earners, but 
also as reflecting changes of activity within important industries 
and changes in the demand for consumers' goods, is such as to make 
the present lack a matter of general concern. 

Most to be desired are statistics which would show the relative 
fluctuations of costs and prices. Unhappily the difficulties in the way 



264 CURRENT ECONOMIC PROBLEMS 

of obtaining such figures are particularly grave. But certainly every 
extension of public authority over corporate activity should be 
utilized to secure such uniform methods of accounting as have been 
imposed on the interested railways, and the reports obtained by the 
government should be made available in some significant form for 
the information of the business public. 

The old barometers of business could also be considerably im- 
proved. The index numbers of commodity prices at wholesale 
would be more useful if separate series were computed for raw ma- 
terials and for the articles manufactured from them, and if the raw 
materials were subdivided into farm, animal, forest, and mineral 
products. The differences between the fluctuations of these several 
groups would be of assistance in determining the causes, and there- 
fore the significance of changes in the grand total. Further, an 
index number of identical commodities in the United States, Eng- 
land, France, and Germany would facilitate the effort to follow 
the concomitant courses of business cycles in different countries 
and to anticipate the reaction of foreign upon domestic conditions. 

Stock prices should be corrtputed upon the index number plan 
instead of in the current form of averaging actual prices of shares. 
To facilitate comparisons the basis chosen should agree with that 
chosen for commodity prices. The distinctively investment stocks 
should be separated from the speculative favorites, and separate 
averages should be struck for railways, public utilities, and indus- 
trials. By proper selection fluctuations in the prices of industrial 
stocks might be made to reflect the fortunes of enterprises especially 
concerned with providing industrial equipment. 

Reports of clearings would be more useful if accompanied by 
index numbers showing the relative magnitude of the changes in 
the actual amounts. Separate averages for these figures should be 
provided for the centres in which financial operations, industrial 
activity, and agricultural conditions are the dominant factors. Fi- 
nally, one of the darkest points of current business conditions in 
America could be cleared up if the rates of discount upon first-class 
commercial paper in these various centres could be regularly ascer- 
tained. 

To extend the list of suggestions for bettering figures of the 
sorts already published would be easy; but enough has been said 
to make clear the character of the desirable changes. In general, 
the need is for more careful discrimination between dissimilar data 
now often lumped together in a single total, the collecting from new 
centres of data already published for New York, more uniform, 
methods of compilation to guarantee the comparability of what pur- 



THE BUSINESS CYCLE . 265 

port to be similar figures, and the computing of relative fluctuations 
upon a common basis. In many, if not all these cases, a double set 
of relative figures is desirable — one set referring to actual average 
amounts in some fixed decade, the other set making comparisons 
with the corresponding period of the previous year. 

132, The Severity of the Trade Cycle in America 

BY V^. A. PATON 

The peculiar characteristics of Modern Industrialism which 
make it susceptible to serious disturbance are too well known to re- 
quire detailed description. They include the detached and imper- 
sonal relations between producer and consumer, and producer and 
investor ; the interdependent nature of co-operative production ; the 
extreme length of the productive process ; the unstable character of 
demand in dynamic society, and frequent and radical changes in 
technique. These characteristics are universal throughout the West- 
ern world; yet American industry has been particularly subject to 
industrial disturbance. 

The inadequacy of our banking system and credit facilities has 
often been urged as the explanation. Since we use credit to a far 
greate-r extent than European countries, we have particular need 
for stability in banking and credit. It is hoped that the new Federal 
Reserve System, by giving in a higher degree than before these 
characteristics, will do much to modify the severity of the ebb and 
flow of the trade cycle. But it needs to be emphasized that banking 
reform can never be mbre than a palliative. Lax banking and un- 
sound currency systems do something to breed speculative fever. 
But the fundamental conditions leading to the severity of these dis- 
turbances lie deeper. 

First among these is the supreme optimism which has always 
characterized American industrial development. Here was a vast 
new continent, with an abundance of land, minerals, natural power, 
and other resources untouched. People from all countries were 
drawn into the task of developing these resources. To them America 
was the long-sought- for "promised land." There were no rigid class 
walls; there existed every opportunity for "self-development." A 
loose social system and the reaction of the physical environment 
made it inevitable that the bourgeoise attitude should prevail. The 
immigrant who, as a peasant in Europe, has no thought of chang- 
ing his status ; the native frontiersman, Yankee son of the old New 
Englander; the prospector looking for diggings — in each you had 



266 CURRENT ECONOMIC PROBLEMS 

the would-be capitalist. There was also the man with capital look- 
ing for sudden wealth in the shape of land concession, franchise 
rights, or public contracts. The situation, the large class of specu- 
lative investors, great and small, and the political organization, mak- 
ing a fetish of the principle of let-alone, could not but induce a 
highly speculative, over-optimistic attitude toward industry. 

A partial justification of American optimism made it the more 
speculative. The scarcity of labor incident to the opening of a new 
country, the demand for improved transportation facilities to permit 
the utilization of new lands and new resources, and the rapid and 
comprehensive" extension of the machine technique into line after 
line of production, did much to convince the American that any- 
thing is possible. 

The changes in industrial technique have been more rapid and 
more extensive than in any other country. The greater and increas- 
ing dependence upon machinery has led to increasing complexity in 
the productive process, as well as to its greater length. The dis- 
turbance in the labor market, such as temporary unemployment, 
which has been chronically incident to its introduction, is but a single 
example of the strain and shock to which the system as a whole 
has been subjected. 

But minor causes have also been at work. The influx of labor- 
ers from abroad has continually altered the proportions between 
the productive factors. In this country, filled with people who have 
broken away from their old surroundings, custom and tradition 
have had comparatively little force ; among us it has been hard for 
conventions, even those adapted to the new situation, to be built up ; 
and the situation as a whole has been particularly sensitive and 
variable, especially in demand. 

This brief statement suggests the essential aspects of the Amer- 
ican industrial structure which has given it its peculiar dynamic 
character, and has made it more highly sensitive to irregularity 
than that of any other country. A word should be added to indi- 
cate how these conditions may intensify the severity of the trade 
cycle. The great speculative optimism of the American people, to- 
gether with the need of improved technological equipment, leads to 
a greatly increased demand for capital goods — producer's goods. 
This means that a great deal of labor power and a large volume of 
capital are devoted to producing these kinds of goods. In other 
words, in America there is an unusual heaping up of society's pro- 
ductive resources in the initial stages of the long-time process. This 
process continues for some time, the boom period. The length of 
time necessary to permit these investments to yield returns is gen- 



THE BUSINESS CYCLE 267 

erally underestimated, as was the case particularly with many of 
the early American railway projects; and in other cases the ven- 
tures are ill advised and could never become profitable. In such a 
situation many entrepreneurs find themselves embarrassed when 
their obligations fall due, and a great many failures ensue. Build- 
ing and development work halts abruptly; prices of raw materials 
fall very sharply ; all prices go down in sympathy, and a more or less 
severe period of readjustment follows. 

In view of the conditions above described, it is difficult to see 
how this country could have had its very rapid development with- 
out these accompanying periods of stress. As the country becomes 
older, as technique becomes more dependable, as social conventions 
standardize demand, as efficient government checks the wildest dis- 
plays of speculative fever, as speculative capital has to look for 
golden opportunities abroad, and as we have to look more toward 
internal organization and economy, rather than to external acci- 
dent, for industrial gain, the ebb and flow of trade depressions will 
be less and less severe. We are perhaps nearer than we know to the 
orderly period wherein their rhythm is as circumscribed as in prosaic 
Europe. 



VI 
PROBLEMS OF INTERNATIONAL TRADE 

Problems come and go, but the tariff seems to be a permanent American 
institution. In a country where "every man is his own political economist" 
it possesses a perennial freshness. It has, time and again, been proved guilty 
at the polls of raising and lowering the standard of living, of increasing and 
decreasing wages, of creating and destroying monopoly, of abetting and dis- 
couraging immigration, of producing crises and causing prosperity. In part 
this has been due to an easy association of the question with sentiments of 
nationalism ; the absence of grave social problems, such as are found in 
more mature societies ; and the popular idea that it is a simple and manage- 
able piece of mechanism. But, in part at least, its popular hold has been 
legitimate. It has been intimately associated with the development of the 
country, and it has served as an instrument for controlling our development. 

However particular tariff questions may be stated, the real issue lies in 
the antithesis between protection and free trade, which are the ends of the 
tendencies underlying particular programs. 

The theory of free trade is "a mere corollary to the principle of the divi- 
sion of labor." Foreign, like domestic, trade, "allows increased specialization," 
and consequently "increases the aggregate of wealth." A study of the mech- 
anism of exchange shows that "goods are paid for with goods." "Foreign 
trade fixes its own limits." The tariff, if used, should have as its object the 
raising of revenue ; it should leave "industrial conditions as it finds them." 
The argument implies a conception of industrial society in static terms, is an 
aspect of the general theory of laissez-faire, and rests upon a belief in the 
efficacy of price as an organizing force. 

The strength of protection lies in a mercantilist spirit as old as society. 
Tradesmen have always been willing to use agencies of social control to in- 
crease their sales. This disposition is revealed in the inhibitions against buy- 
ing goods out of town, supported by custom or opinion; in the attempts of 
legislatures to exempt manufacturing establishments from taxation ; and in 
duties placed upon imported goods. 

Nevertheless, there is a social theory of protection. It rests upon the 
concept of a developing society, the necessity of social direction of that de- 
velopment, and the possibility of determining, partially at least, its course by 
assessing, raising, lowering, and removing duties upon imported goods. It 
implies a constant adaptation of the "tariff policy" to the changing condition 
of the country. This theory reveals itself in the arguments that protection 
can transform an agricultural into an industrial society, develop a nation 
strong in arms, add industry after industry to the national wealth, and 
"scatter plenty o'er a smiling land" by piling up huge aggregates of capital. 

All of these things, it is asserted, it has accomplished for American so- 
ciety. Unfortunately we have no trustworthy evidence of the role it has 
played in the transformation of our system. The histories of the tariff are 
largely records of what has happened to it rather than of what it has done. 
The argument "from experience" has failed to disentangle the influence of 
the tariff from the vast complex of "forces" which together have made our 
system what it is. Yet it is quite evident that the tariff has played its part 
in the creation of our highly pecuniary, industrial, and urban culture. The 
development of manufacturing and mining, upon which the structure so 

268 



THE TARIFF PROBLEM 269 

largely rests, would have come without protection; for our abundant natural 
resources could not be ignored; but a highly accelerated movement necessi- 
tated high prices, increasingly large quantities of cheap labor, and larger and 
larger aggregates of capital. Protection promised high prices ; the open door 
to immigrants offered cheap labor : either would have sufficed. But to make 
assurance doubly sure we chose both. Protection, with other agents, has 
transformed resources into stupendous incomes, out of which large aggregates 
of capital have been saved and reinvested. Thus it has been an active factor 
in our "prosperity." It need not be said that, in view of changed conditions, 
its potency in the past is no guaranty that in future it can play an identical 
role. 

But our social scheme has proved too complex for it to accomplish just 
the industrial effects it was intended to accomplish and no more. With com- 
plementary factors, it has induced a gigantic, clumsy, feverish development 
of manufacturing and mining ; it has caused a headlong "lunge" in a particular 
direction. But it has induced the inevitable attendants of this growth — 
urban life, city comforts, luxury, slums, poverty, and vice; greater concen- 
tration of wealth and more pronounced class differences ; a medley of races 
and a babel of tongues; a clash of political and ethical systems; a vast ar- 
ray of bewildering problems. It has been responsible for development in 
ethics, politics, and social life, though it has been impotent to direct this 
development. It has made the attention to these aspects of social life more 
imperative than ever, though the "prosperity" which it has induced has served 
to delay our attention to the question of whether the older institutional sys- 
tem is adequate for the newer industrial life. In short, it has induced growth, 
faster than we have been able or willing to perfect means for controlling that 
growth. Its results, too, have been accompanied by prodigious waste. That 
its "good" is so conspicuous is due largely to our enjoyment of gains from 
the exploitation — the oz/^r-utilization — of our natural resources and our pass- 
ing of the costs to succeeding generations. 

Aside from the theoretical difficulties, the method of its use prevents 
protection from being an adequate means of social control. Since a legis- 
lative body is depended upon for tariff laws, we may well say, "Protection 
is all right in theory, but it will not work in practice." Did you ever hear of 
Congress, when considering a tariff bill, giving attention to the "end" to be 
reached, noting carefully the larger social as well as the purely industrial re- 
sults of anticipated duties, carefully calculating gains against costs, and on 
this basis fixing duties for periods just long enough to secure the desired 
results? Or have you rather noted that, without attention to general prin- 
ciples and the relation of particular duties to these, a tariff bill is evolved 
through an aggregation of compromises between particular interests? 

But the tariff is still our heritage. At present there is some disposi- 
tion to treat it as a "moral issue" intimately connected with the fact of 
class and the distribution of income. There is a demand, perhaps waning 
but still strong, for a "scientific revision." This finds its source, partly in a 
protest against the way in which Congress draws a tariff bill, and partly in a 
superstitious reverence for whatever wears the label "scientific." Its weak- 
ness is that it fails to see that science can furnish only a mechanism, and that 
the nature of the tariff depends largely upon the theory underlying legisla- 
tion. There is a cry for "freer trade" from manufacturers who believe that 
our industrial future lies "beyond the seas." And, of course, there is the per- 
ennial cry for higher duties and more of them. But, above all, there is rea- 
son for believing that the limitations of the tariff for good or bad are being 
more clearly seen, and that in the future it will be supplemented by othei 
and more delicate instruments of control which together can impart to social 
life a more symmetrical development. 



270 CURRENT ECONOMIC PROBLEMS 

A. THE BASIS OF INTERNATIONAL TRADE 
133. International Co-operation'^ 

BY CHARLES GIDE 

The advantages of international trade are not susceptible of 
arithmetical calculation. They are too complex for such simple 
methods, and are found on both the side of imports and that of 
exports. 

The following are the advantages of importation: 

I. Additional well-being is imparted by the imported goods 
which a country, because of its resources or climate, could not have 
produced within its own borders. For example, without interna- 
tional commerce, Holland could have no building stone, Switzerland 
no coal, England little lumber and no wine, France no copper, and 
the United States no tea or coffee. 

II. Economy of labor is realized when wealth is imported that 
could be produced at home only at a higher cost than abroad. France 
could make good machinery, but it is more profitable to import it 
from the United States, which is better provided with coal, iron 
and facilities for manufacturing. To realize this advantage it is 
not necessary that the importing nation be inferior in the production 
of the good it receives from abroad. It may be to its advantage to 
import goods which it might produce under even more favorable 
conditions than the country which sends them. Cuba, for example, 
might be able to produce wheat more advantageously than the United 
States, but also to produce sugar even more advantageously. In this 
case it will be more profitable for Cuba to raise sugar and import 
wheat, despite her advantage over the United States in the produc- 
tion of wheat ; for thus she can purchase through sugar what other- 
wise would have cost her more labor to produce. Thus it may happen 
that a country in all points superior to its neighbors will find it 
profitable to import goods from them. 

An allied advantage is that whenever an accident of any sort 
unexpectedly reduces the productivity of one country, it may depend 
upon others to remedy this accident, which, in the absence of inter- 
national commerce, might have disastrous consequences. Thus in- 
ternational commerce provides a kind of insurance against famines 
and against the severe stress of national panics and depressions. 

Although a nation could perhaps produce a sufficient quantity 
of many commodities which at present it imports, the quantity at 

^Adapted from Principles of Political Economy, 2d American ed., 303- 
307. Translated by C. William A. Veditz. Copyright by D. C. Heath & 
Co. (1903). 



THE TARIFF PROBLEM 271 

home could be increased only at a very great cost in labor and 
capital and a consequent increase in prices. The United States, for 
example, imports a large quantity of lead. If imports were cut off, 
it would be necessary to work poorer mines, and incur the neces- 
sarily greater costs, which, in higher prices, will obviously fall upon 
the consumers of lead. 

As for exportation, the following are its advantages : 

I. It utilizes natural resources and productive forces which, if 
there were no foreign outlet, would be superabundant, and there- 
fore partially useless. Were it not for exportation, Peru would not 
know what to do with her nitrates, Australia with her wool, Spain 
with her wines, Pennsylvania with her iron and steel, nor the South 
with its cotton. 

II. It develops a nation's industry. It is well known that the 
extent of the division of labor and the progress of large-scale pro- 
duction are proportionate to the size of the market. Division of 
labor cannot be at all detailed when the market is small, whereas with 
every extension of the market a more elaborate division of labor 
and the introduction of more expensive but in the long run mc«"e 
productive processes and machinery becomes possible. Interna- 
tional trade, by creating world-wide markets for goods, tends to de- 
velop the division of labor ; it leads to a fuller utilization of the 
possibilities of the soil and the population, to a completer develop- 
ment of acquired aptitudes, and hence to a great increase of the 
productive energy of humanity. England could never have become 
the great manufacturing nation it now is, did it not export to all 
parts of the world. The possession of an extensive market made it 
possible for her to make immediate and profitable use of the latest 
inventions and improvements in manufacturing. 

134. The Law of Comparative Costs- 

BY Fred M. TAYLOR 

Here is a lawyer who very likely can mow his lawn, cultivate 
his garden, and take care of his furnace much better than the per- 
sons whom he hires to do these things. But what he does is to de- 
vote himself to his profession, and buy the services named from 
other people ; and of course he acts wisely in so doing. It is clear 
that he gains most by devoting himself to the thing for which he is 
best fitted. He is not interested in the fitness or unfitness of his 
neighbor as compared with himself, but rather in the superiority of 

"Adapted from Principles of Economics, 2d ed., 75-77. Copyright by 
the author. Published by the University of Michigan (1913). 



2 72 CURRENT ECONOMIC PROBLEMS 

his own fitness in one line as compared with his fitness in another 
Hne. So long as he can find a market for his output, it is better for 
him to devote his time to doing the things for which he is pre- 
eminently fitted, and get his supplies of other things from his neigh- 
bors, even though he can make those other things better than they. 

It is evident that in this respect the case of the community or the 
nation is like that of the individual. The upper peninsula of Mich- 
igan produces little but copper and iron, getting most other goods 
through exchange with other communities. Yet it would be easy to 
prove that this section is really better fitted to produce some of the 
things which it buys than the sections from which it buys them. 
The explanation is to be found in what has long been known as the 
Law of Comparative Costs. It may be stated as follows : 

Ignoring cost of transportation, two communities find it profit- 
able to specialize respectively in the production of two commodities 
and to exchange those commodities each for the other, provided the 
comparative real costs of the two commodities in one community 
are different from their comparative real costs in the other com- 
'munity. 

Let us illustrate. Letting labor represent all real costs, suppose 
that in England the cost of a ton of iron is 25 days' labor and the 
cost of a yard of broadcloth is 5 days' labor; while in America the 
cost of iron is 16 days' labor and that of broadcloth 4 days' labor. 
These costs may be expressed in the following proportions : 
Eng. cost Iron : Eng. cost Cloth : : 25 : 5 
Amer. cost Iron: Amer. cost Cloth:: 16:4 

Since in England a ton of iron costs five times as much as a yard 
of cloth, it will naturally tend to be worth the same as five yards 
of cloth ; under which conditions England can afford to give iron 
for cloth if, and only if, she can get more than five yards per ton; 
or trade cloth for iron if, and only if, she can get it with less than 
five yards per ton. In America, on the other hand, a ton of iron 
tends to be worth four yards of cloth ; under which conditions Amer- 
ica can afford to trade iron for cloth if, and only if, she can get 
more than four yards per ton ; or to trade cloth for iron if, and only 
if, she can get it with less than four yards. But the first hypothesis 
for England and the second for America are plainly shut out. Eng- 
land cannot get more than five yards of cloth for iron, since in Amer- 
ica it is worth only four yards. So America cannot buy with less 
than four yards of cloth since it is worth five yards in England. On 
the other hand, the second hypothesis for England and the first for 
America fit each other perfectly. England can get iron for less than 
five yards, since it is worth only four in America ; and America can 



THE TARIFF PROBLEM 273 

sell iron for more than four yards of cloth, since it is worth five in 
England. Accordingly, under the conditions supposed, an exchange 
of English cloth for American iron would be profitable. 

It goes without saying that if one nation is absolutely inferior to 
its neighbor in respect to the production of one commodity and abso- 
lutely superior in respect to the production of another, then, obvi- 
ously, the comparative costs of these commodities in one country 
are different from their comparative costs in the other, and so ex- 
changing them will pay. 

But, as the argument above has shown, it is equally clear that 
if a nation is absolutely superior to another in the production of 
each of two commodities, it will produce the one in which its su- 
periority is the greater, and will import the latter. Likewise, if a 
nation is inferior to its neighbor in each of two commodities, it will 
produce the one in which its inferiority is less, and import the other. 

135. The Theory of Free Trade 

The theory of free trade is nothing else than a deduction from 
the advantages of foreign trade, or rather, of trade. The industrial 
policy of a people is concerned, not with the welfare of classes or 
the productive profits of particular individuals, but with securing 
for the people as a whole from the limited social resources at their 
command the largest amount of material wealth. This involves a 
problem of economic organization. This problem can be solved in 
two ways, logically antithetical, as well as in innumerable intermedi- 
ate ways which combine the two primary solutions. 

The one is the resolution of the economic world into a large 
number of infinitely small districts. In each district there is a body 
of people, a fund of accumulated capital, and land possessed of 
definite productive powers. The people, capital, and products of 
each district are to be kept clearly within the confines of the district. 
Commercial intercourse and personal movement from district to dis- 
trict are to be prohibited. Thus each district is called upon to solve 
its own problem in economic organization. It must directly satisfy 
the wants of its own people ; to that end it is compelled to make the 
best possible accommodation of its labor and capital to its natural 
resources. It need not be said that under such a system of small self- 
sufficient units, few wants could be satisfied; little capital could be 
accumulated; the advantages of specialization would be lost; little 
natural skill could be developed ; and only limited potentialities of the 
natural resources could be utilized. 

The alternative is the treatment of the economic world as a 
single industrial unit. Population and capital are to be allowed 



274 CURRENT ECONOMIC PROBLEMS 

freely to move wherever they please ; there is to be no barrier to the 
free exchange of goods. The problem of economic organization is 
to be worked out for the economic world as a single entity. Under 
freedom from interference, population and capital will gravitate to- 
wards those places where they can get the largest returns, or where 
they can best utilize nature's contributions. Where they go, indus- 
tries will be established. The goods produced will not have to be 
consumed in the region in which they are produced ; they will like- 
wise naturally seek the places where they can command the high- 
est prices. Under this system the people of any territory do not seek 
directly to supply all their own wants. They produce surpluses of 
the goods in the making of which natural resources or acquired skill 
make them pre-eminently fit, and exchange them for similar sur- 
pluses produced by their neighbors, far or near. Such an economic 
organization is nothing else than a territorial division of labor. It 
makes industry more efficient through the better utilization of natural 
resources, through the development of specialized skill, and through 
the larger volume of capital accumulated out of the larger earnings. 
The expenses of trade are a tax upon this system ; but the exchange 
which trade makes possible pays at least its own expenses. If it 
failed to do so, it could not be carried on. In the majority of cases 
it yields, in addition, a surplus to both parties. 

Neither of these alternatives can be perfectly realized. The 
former cannot be, because it is practically impossible to find a unit 
of territory logically small enough. The latter cannot be, because 
of the expenses of transportation. The cost entailed by distance will 
always involve the element of a scattering over wide territories of 
the establishments producing many separate goods. It will permit 
only a few localized industries to satisfy world-wide demands. But 
distance is to be looked upon, not as a friend, but an enemy, to ma- 
terial progress. Every invention in transportation which reduces the 
costs of carriage is. to be regarded as a means to greater social 
economy, and as an effective device for extending still further the 
market, specializing more narrowly in production, and swelling the 
volume of material goods. On the contrary, everything which in- 
creases costs must be looked upon as a device tending to break society 
up into smaller groups, decrease the area of the market, and reduce 
the amount of material wealth. Now, protection is a system of taxes 
the object of which is to cause industrial society to be organized 
in a smaller group than otherwise it would be. It is nothing else 
than an increase in the costs of carrying goods from place to place. 
Consequently its interference with the establishment of a natural 
economic organization prevents the fullest utilization of limited 



THE TARIFF PROBLEM 275 

social resources and leads to the production of a smaller volume of 
goods than would be attained through free trade. 

The theory of free trade is premised upon the proposition that a 
trade yields an advantage, not to one, but to both parties to the 
transaction. Since society is an aggregate of individuals, trade in 
aggregate yields a corresponding advantage. Political lines are arti- 
ficially drawn. Their presence cannot affect either the nature or 
the advantages of trade. Therefore the way to fullest national pros- 
perity, not for particular individuals or industries, but for society 
as a whole, is through the policy of untrammeled commerce. 

B. THE MECHANISM OF INTERNATIONAL TRADE 

«. 

136. The Theory of International Exchange 

Let us try to determine how settlement is made by a country for 
goods bought abroad. It is evident that the trade in question is not 
between the countries involved, but between individuals living in 
these countries. To get to the heart of the matter, let us take a very 
simple illustration : 

Suppose that Brown, a New York exporter of wheat, sells to 
Carpenter, a London importer of wheat, 10,000 bushels of wheat at 
the rate of five bushels for £1. Suppose, too, that at approximately 
the same time, Dixon, a London exporter of china, sells to Andrews, 
a New York china merchant, a consignment of china valued at 
£2,000. It is evident that as the matter stands, Andrews in the 
United States must remit £2,000 to Dixon in London, and that Car- 
penter in London must remit £2,000 to Brown in the United States. 
If each debtor sent the actual money to his creditor, the money would 
have to cross the ocean and come back again. 

But, cannot some economy be devised to avoid the trouble and 
expense of this useless shipment? It can be done very simply. 
Brown, let us say, meets Andrews. He tells Andrews of his sale of 
grain ; Andrews, in turn, tells him of his importation of china. To- 
gether they hit upon a plan of avoiding the shipment of gold to 
cancel the debts. Brown writes out an order on Carpenter instruct- 
ing him to pay the sum due him to Andrews. This he presents to 
Andrews, who, in return, pays him in gold the American equivalent 
of £2,000. Since the amount of gold in one pound sterling is equal to 
$4.8665, this amounts to 2,000 times $4.8665. Andrews indorses the 
order which he has received from Brown and sends it to Dixon in 
payment for his china. Dixon, in turn, presents it to Carpenter, who 
pays him £2,000. Thus, it is evident, both Brown and Dixon have 
been paid in full the amounts due them, and Andrews and Carpenter 



276 CURRENT ECONOMIC PROBLEMS 

have discharged their full indebtedness. Yet not a single gold coin 
has made. the ocean voyage. 

Although the illustration just taken is much simpler than w^hat 
actually happens, it fully embodies the principles. There are three 
complications v^^hich keep the matter from working out so simply. 
The first is that the Brown and Andrews of our illustration are not 
likely to know each other personally. This difficulty is obviated by 
the estabhshment of exchanges. Brown takes his draft to the ex- 
change and sells it, thus securing payment for the amount due him. 
Andrews goes to the exchange and buys a draft, which he sends to 
Dixon in discharge of his obligation. An exchange broker acts as 
intermediary, and the matter is as nicely handled as in the illustra- 
tion above. 

The second difficulty is that the drafts bought by the exchange 
are not always of just the denominations to accommodate those who 
wish to discharge foreign indebtedness. This difficulty is as easily 
obviated. The exchange, let us say, establishes a London branch. 
Drafts bought are sent to London for collection. The collections 
are deposited to the order of the New York house. This constitutes 
a fund against which new drafts can be drawn by the New York 
exchange broker. 

The third difficulty is that at any particular time imports and 
exports do not balance. Consequently there is a tendency for the 
demand for and supply of bills to fail of exact correspondence. But 
this difficulty, too, is overcome, at least partially. What is bought and 
sold, it must be remembered, is gold to be delivered at a particular 
place, London. If the demand and supply are in exact correspond- 
ence, the price of £1 in London will be practically $4.8665. This 
figure is found by dividing the number of grains of pure gold in a 
pound sterling by the number of grains in a dollar. But they are 
not always in exact correspondence. Let us see how much they can 
vary. Now it is obvious that Brown has two alternatives. He can 
sell his draft, or he can have the gold due him collected in London 
and brought to New York. To take the latter alternative will cost 
him in freight and insurance charges nearly 3 cents. Since he col- 
lects $4.8665 in London, he will receive net about $4.8385. Ac- 
cordingly, it is to his advantage to sell his draft, rather than import 
the gold, if he can secure for it anything above $4.8365. Similarly, 
Andrews has two alternatives. He can buy a draft, or he can send 
gold to London to discharge his indebtedness. Since it will cost 
him about 3 cents per £1 to follow the latter course, this will amount 
to paying $4.8965 for every £1 due in London. Accordingly he will 
prefer to buy a draft if he can secure it for a figure lower than 



THE TARIFF PROBLEM 277 

$4.8965. The figures $4.8365 and $4.8965 are, therefore, called "the 
gold points," the former being the importing point, and the latter the 
exporting point for gold. 

It will be shown in a later reading that as the rate of exchange 
tends to approach the lower point, owing to extensive selling abroad, 
this in itself stimulates imports, which tend to increase the demand 
for exchange and hence to lower its price. And, similarly, when 
the rate tends to approach the higher point, exportation is stimu- 
lated, and as a result more bills are thrown on the market, thus 
bringing down the price. Thus in general the volume of imports and 
exports does not for a very lengthy period present very serious dis- 
crepancies. It may then be safely said that international trade is a 
very complicated system of barter. 

137. The Favorable Balance o£ Trade 

BY THOMAS MUN^ 

Although a Kingdom may be enriched by gifts received, or by 
purchases taken from some other Nations, yet these are things un- 
certain and of small consideration when they happen. The ordinary 
means therefore to increase our wealth and treasure is by Forraign 
Trade, wherein wee must ever observe this rule; to sell more to 
strangers yearly than wee consume of theirs in value. For suppose 
that when this Kingdom is plentifully served with the Cloth, Lead, 
Tinn, Iron, Fish, and other native commodities, we doe yearly ex- 
port the overplus to forraign Countreys to the value of twenty-two 
hundred thousand pounds by which means we are able beyond the 
Seas to buy and bring in forraign wares for our use and Consump- 
tions to the value of twenty hundred thousand pounds : By this 
order duly kept in our trading, we may rest assured that the King- 
dom shall be enriched yearly two hundred thousand pounds, which 
must be brought to us in so much Treasure ; because that part of our 
stock which is not returned to us in wares must necessarily be 
brought home in treasure. 

For in this case it cometh to pass in the stock of a Kingdom, as 
in the estate of a private man ; who is supposed to have one thou- 
sand pounds yearly revenue and two thousand pounds ready money 
in his Chest: If such a man through excess shall spend one thou- 
sand five hundred pounds per annum, all his ready money will be 
gone in four years ; and in like time his said money will be doubled 

^Adapted from England's Treasure by Forraign Trade, or The Ballance 
of our Forraign Trade Is the Rule of Our Treasure, chap, ii (1664). 



278 CURRENT ECONOMIC PROBLEMS 

if he take a Frugal course to spend but five hundred pounds per 
annum, which rule never faileth likewise in the Commonwealth. 



BY CHARLES W. :PAIRBANKS* 

The history of our foreign trade during the sixteen years fol- 
lowing the Cleveland administration shows that our commerce 
continually expanded under the protective policy. One of the fine 
things about it was that our exports far exceeded our imports ; 
that is to say, we sold abroad more than we bought abroad, and as a 
result there was a substantial trade balance in our favor. The 
excess of our domestic exports over imports in the sixteen years 
ending March i, 1913, was $7,348,942,251^. The magnitude of 
this addition to our national wealth may be more fully realized 
when we reflect that the total net balance to our credit upon our 
foreign commerce from George Washington's first term to Wil- 
liam McKinley's first term was less than $400,000,000. 

Our free-trade friends seem to ignore the wisdom of keeping 
our money at home so far as we reasonably can by buying at home. 
Whether we send abroad a hundred millions of' dollars more or 
less to pay for commodities produced by foreign labor is a matter 
of slight importance to them. We who hold to the protective sys- 
tem conceive it to be sound pohcy to patronize our home producers 
where possible, and keep the money in our own midst. If it goes 
abroad, it is, of course, withdrawn from our pockets, but if it 
remains at home it goes into the circulation of our own trade and 
our countrymen — laborers and farmers, merchants and manufac- 
turers — have a chance to get it sooner or later. 

138. The Mystery of the Balance of Trade^ 

BY harti,e;y withe;rs 

The statistics published by our Board of Trade show that for 
191 2, which is a typical year, our net imports, including bullion, 
amounted to £702,000,000, while our exports, including bullion, 
reached only £552,000,000. This gives a net excess of imports over 
exports, including gold shipped both ways, of approximately 
£150,000,000. 

_ ■'Adapted from an address entitled "Let Us Now Unite in the Old Faith," 
delivered before the Indiana Republican State Convention at Indianapolis, 
April 23, 1914. 

^Adapted from Money-Chatiging : An Introduction to Foreign Exchange, 
5 1-63, 78-82. Published by E. P. Button & Co. (1913). 



THE TARIFF PROBLEM 279 

Now this huge excess of imports, which is much bigger in the 
case of England than in that of any other country, is often very 
terrifying to people who have not thought much about the subject. 
It is commonly called an adverse balance of trade, a phrase which 
has an uncomfortable sound, as if there was something chronically 
rotten in the state of our commerce, and it is sometimes used as a 
proof that other countries are continually pouring goods into us and 
taking nothing from us in return, and that this is a state of things 
which ought immediately to be stopped in the interests of the national 
welfare. If this were true, it would seem, on consideration, to be 
rather a comfortable state of affairs. Any individual who could 
arrange his commercial relations with his fellows on these lines 
would be likely to wax very fat. To be always consuming more than 
he produced is just the sort of life that would have been thoroughly 
agreeable to the Economic Man. With a nation, likewise, it would 
seem to tend to the enjoyment of plenty with little effort. 

But, in fact, these things do not happen. The other countries of 
the world have not conspired together to kill England with kindness 
and give us £150,000,000 worth of goods every year for nothing. 
Goods are never sent anywhere unless there is a reasonable cer- 
tainty that the country to which they are sent will be able to pay 
for them. The foreign seller of goods expects to be paid in money 
of his own country by selling his claim through the machinery of 
exchange. But if the importing country were always buying more 
than it sold, the supply of claims on it would be continually greater 
than the demand for them and the exchanges would be steadily 
going against it, and it would either have to export gold or export 
promises to pay as long as it could finance itself on Mr. Micawber's 
principles. 

Now it is certain that we are not exporting gold. Year in and 
year out we import more gold than we export. It is also certain 
that we are not on balance exporting promises to pay, either our 
own or other people's. If we were doing the former, we should be 
raising loans abroad or exporting or selling our securities abroad, 
neither of which things we are doing. If we were exporting other 
people's promises to pay, it would mean that we were selling to 
foreigners out of our holdings of foreign securities. But this is 
not happening to any great extent. Nor do rates of exchange move 
steadily against us, as they must if we were really leading the 
profligate life of commercial dissipation that a glance at the figures 
might lead the unwary to infer. 

It is thus clear that the big gap between our recorded exports 
and imports of goods is filled by unrecorded, and so usually called 



28o CURRENT ECONOMIC PROBLEMS 

"invisible," exports of various kinds of services, and that there is 
no need to be frightened about it. England does about one-half of 
the carrying trade of the world. It is quite evident that these 
carrying services do not themselves pass through custom-houses, and 
hence are "invisible." And it is evident that a large part of our 
surplus of imports consists of payments for these services which we 
are performing for foreigners. 

In addition to this there is an equally elusive factor in the shape 
of the import and export of securities and interest on capital. Almost 
every country in the world is a lender or a borrower. The borrower 
exports securities, or promises to pay, and takes in return the goods 
or services it requires. Later on, when interest payments fall due, 
the lender has coupons to export, and the borrower has to ship goods 
to meet them. When Russia raises a loan in France it exports its 
bonds or promises 'to pay, and sells them to thrifty French investors. 
Thereafter French investors export coupons every half-year to 
Russia, representing claims of interest due. Thus the exportation 
of securities and the subsequent exportation of coupons by the 
lender both tend to produce the same result, a balance of visible 
imports. 

Consequently we find that this adverse balance — or excess of 
visible imports — is a feature in the trade figures, both of the young 
and go-ahead countries that are habitual borrowers and are always 
exporting securities, and of the old established nations that have 
plenty of accumulated capital to spare and have placed blocks of it 
abroad, and so always have plenty of coupons to export. In both 
of these cases there is an invisible export, in one case of securities, 
in the other of coupons, which usually has to be met by visible 
imports of goods, which thus create a so-called adverse trade balance. 
The so-called favorable- trade balance, under which a country shows 
more goods going out than coming in, is chiefly shown by those 
nations which have reached the stage of being in a position to pay 
interest on borrowed capital out of their own productions, without 
having to borrow more from their creditors in order to meet interest. 
The United States is typical of the last class, Canada and England 
of the first. The actual import of securities, then, should tend to 
produce an excess of exports, and an export of coupons to secure 
a surplus of imports. 

But there are other invisible items that get into the total. Every 
American who goes forth with his Baedeker to widen his mental 
horizon in England brings with him a supply of notes. These have 
been bought for gold in New York, and consist of claims on London 
merchants created by the importation of American goods. Conse- 



THE TARIFF PROBLEM 281 

quently his notes pay for the beefsteaks which he, an American, 
consumes under EngHsh skies, and for the invisible culture which 
he takes back to his native land. The goods which he consumes in 
England are properly to be regarded as English exports. 

Another streamlet which sometimes swells into a respectable 
torrent is made by the many drops poured in by poor immigrants 
into new countries, who send home to their kinsmen such small sums 
as they can spare. In this respect Italy is believed to score heavily. 
The Italians seem to take with them the home-grown power of 
living largely on sunshine and good humor, and the sums they send 
home are an important cause of the power shown by Italy to main- 
tain a so-called adverse trade balance, without the assistance of 
investments abroad or the profits of a big carrying trade. Ireland 
is another country that takes toll of the rest of the world through 
the filial piety of her sons who have gone abroad to seek their for- 
tunes in lands where thews and sinews find a better market than at 
home. 

Another class of emigrant in another way helps the older 
countries by causing a drain on the country of its origin. This class 
is formed by the wealthy American heiresses who find English and 
European husbands and draw year by year large sums from the 
United States in the shape of dowries, so that this item in the trade 
balance is usually called the "dowry drain." In this case Europe and 
England can balance against the excess of imports the exportation 
of conjugal affection and social prestige. 

The presence of these items, which escape customs statistics, 
shows that after all our exports and our imports balance each other, 
and that there is no real balance of trade. 

139. The Reciprocal Character of International Trade^ 

BY FRE;d M. TAYI.OR 

Let us remember the fundamental fact that settlement between 
the merchants of different countries is made, not directly, but 
through the assistance of exchange dealers. That is, the claims of 
each community on other communities get into the hands of ex- 
change dealers who settle with the exchange dealers of the other 
communities. This means that there is developed a traffic in such 
claims ; they are bought and sold like flour or iron. Every day the 
prices of such claims per unit of value are quoted in every important 
newspaper. Like the prices of other things, the prices of exchange 

'Adapted from Some Cliapters on Money, 128-134. Copyright by the 
author. Published by George VVahr (igo6). 



282 CURRENT ECONOMIC PROBLEMS 

rise and fall, according as the demand rises or falls, or as the supply 
falls or rises. Thus exchange on London ranges from about $4,835 
per English sovereign to about $4,895, its natural par being $4.8665. 
If we are selling to Europe much more than we are buying from her, 
so that claims on Europe are very abundant in New York, London 
exchange will drop to, say, $4.84 or $4,835. If, on the other hand, we 
are buying much more than we are selling, so that the demand for 
claims on Europe is very much greater than the supply, the price 
will go up to, say, $4.89 or $4,895. 

These rises and falls have a vital relation to the movement of 
gold. The going or coming of gold is entirely a matter of price, or 
rate of exchange. If the rate is as high as $4,895, this means that 
there is on the market practically no exchange having its origin in 
sale by us to the rest of the world ; so that, if any is wanted, it must 
be created by sending gold. This rate further means that the ex- 
change dealer can afford to send gold in order that he may create 
exchange which he can sell at the prevailing price ; for, at that price, 
he will get his money back at a fair profit. Below that point, how- 
ever, he could not afiford to send gold for the purpose, since the 
cost added to the natural price of the bullion would exceed the price 
obtained from the exchange. Accordingly, if anything happens when 
exchange is at $4,895 to make exchange abundant and bring down 
the price, the exporting of gold for exchange purposes will at once 
become unprofitable, and, hence, cease. 

But, not only does the exporting of gold depend upon the rate 
of exchange, this is also true of the exporting of goods. The rate 
which makes it profitable to export gold also makes it more than 
usually easy to export goods, to induce foreigners to buy goods. 
Thus, suppose you are a wheat exporter and hope to make a 
10,000-bushel sale to a certain Liverpool miller. If you do so you 
will have ready for sale to your banker a bill of exchange for, say, 
£1,650. Now if with exchange at par the proceeds of this draft, 
$8,028.90, would give a fair profit on the deal, it is plain that with 
exchange at $4,895 they would give you an additional profit of 
$47.85.. Plainly then you could afford to shade the price a little in 
order to make a sale more likely, i.e., you could offer a price of 
80 cents a bushel rather than one of 8oj4 cents. In large transac- 
tions of this sort, a difference of % of a cent, or even ^ of a cent, 
often determines for or against a sale. It follows, therefore, that 
_ high rate of exchange acts as a stimulus to increase exports. 

The consequence of the increase in exports, due to the high rate 
of exchange, will manifestly put some foreigners in debt to us. It 
will therefore increase the supply of claims on other countries. But 



THE TARIFF PROBLEM 283 

this increase, will tend to lower the rate of exchange till it is less than 
$4,895. But this is the rate necessary if gold is to be exported. 
Hence the increase in exports due to the high rate of exchange will 
tend to stop the export of gold. 

The chain of reasoning is now complete. Gold cannot go until 
exchange reaches a very high point. But a high point for ex- 
change stimulates exports ; the increase in exports presses down the 
rate of exchange; and the lowered rate of exchange stops the out- 
flow of gold. 

But other factors are working to the same effect. A persistent 
net movement of money tends to be stopped by the action of condi- 
tions which its own continuance establishes. In other words, a 
money-drain is self-corrective. 

Its first check upon itself is to cause an inflow of floating capital. 
The process is as follows : First, a money drain from any country 
— which will of course be a drain from its chief commercial and 
banking center — tends to make the stock of money in that centre 
relatively small. This will affect especially the surplus reserve of 
the banks, since it is from this reserve that money for export will 
be taken. Second, this depletion of reserve will tend to raise tempo- 
rarily the rate of discount on short-time loans. Third, the high rate 
of discount thus established will make the country a desirable market 
for lenders, and so will tend to draw in the floating capital of neigh- 
boring countries. But, finally, as such a movement must in the 
nature of the case be a rapid one, it will almost necessarily stop the 
gold drain. In ordinary cases, this process is adequate to stop an 
excessive drain. But, if it does not prove to be so, a new and 
slightly different ■ series of reactions follow and usually effect the 
desired result. 

Under modern conditions there are many securities having an 
international character. The prices of such securities are soon 
affected by the causes which lead to an inflow of floating capital and 
so to the inflow of money. That is, when the bank reserves of New 
York become scanty and the rate of discount rises, it quite probably 
leads to a fall in the prices of securities. For a large part of the 
buying of securities is based on borrowed capital; and, therefore, if 
money is hard to get, the inclination of people to buy the securities 
is diminished. In consequence the demand falls off, perhaps the 
supply is increased, and inevitably their prices will fall. But if the 
prices of securities fall, foreigners will be encouraged to buy them. 
In turn this buying will give New York a supply of exchange on 
Europe. As a result the rate of exchange will fall' below th-e gold 
point, thus making the export of gold no longer profitable. There- 
upon the drain will cease. 



284 CURRENT ECONOMIC PROBLEMS 

There is yet another chain of causation which comes into opera- 
tion, probably a Httle later than the others. The same high rate of 
discount, if long continued, leads to a fall in the price of the great 
export staples, such as cotton and wheat, which are speculated in 
like securities, and this fall in price leads to increased buying by 
foreigners, which makes foreign exchange abundant, which in turn, 
lowers the rate and checks the outflow of money. 

Finally, if the outflow could go on long enough to produce a 
scarcity of money in the country as a whole there would result a 
general fall in prices which would stimulate foreign buying all along 
the line, until the direction of the money movement was completely 
reversed. As a consequence of the action of these several checks 
there is never any danger that an export of money will go on until 
a country is denuded of its precious metal. This is equivalent to 
saying that international debts are usually paid in goods, or that 
international trade is reciprocal. 

C. THE DEMAND FOR LOCAL PROTECTION 
140. Keeping Trade at Home^ 

"A dollar spent in Auburn gives you another chance at it; but, 
if it is spent out of town, it's 'Good-bye Mary.' " 

"Down with the parcels post. No more diabolical device was 
ever perfected by the big cities for stripping the small towns and 
country districts of all their surplus cash. Let the rich mail-order 
houses wax fat with the dollars that are the property of local mer- 
chants." 

"Everything bought from the city takes just so much money out 
of town." 

"The summer boarders are a great blessing to our little village; 
they put into circulation a lot of money which means at least tempo- 
rary prosperity." 

"If I were mayor, and had my way, I would place a fine of one 
hundred dollars on every man who ordered goods from a mail- 
order house." 

"The individual can get rich only by selling more than he buys. 
Likewise a community can prosper only by selling to other communi- 
ties more than it buys from them." 

"Brethren, let me call your attention to the fact that Brother 
Hiram Johnson, who, this week, is opening a new grocery store on 

'^It seems unnecessary to give a specific reference to the source of each 
of the excerpts given below. The reader by a little attention to local papers 
can easily duplicate it. The editor is indebted to Taylor, Principles of 
Economics, for several of these excerpts. 



THE TARIFF PROBLEM 285 

Main Street, is a member of this church. If you patronize him, you 
will not only contribute to the prosperity of an excellent grocer, but 
you will be helping a fellow Christian and Methodist." 

"The European war will in a way, too often overlooked, con- 
tribute vastly to the prosperity of the Pacific Coast. Americans an- 
nually have been spending more than $200,000,000 in foreign travel. 
No sane man can for a moment doubt that practically every dollar of 
this is lost to the home circulation. Now it will be spent in travel 
to the Pacific Coast. Cahfornia will get the largest share of it. 
This money will spell prosperity for every one of the state's indus- 
tries. But, we must remember the duty we owe our state. We can 
profit by this increase in wealth only if we keep clearly in mind the 
precept that it must be spent for things produced at home. Let us 
see to it that the dollars thus given us do not find their way out of 
the state." 

"When I came to Marblehead they had their houses built by 
country workmen and their clothes made out of town, and supplied 
themselves with beef and pork from Boston, which drained the town 
of its money." 

"The annual influx of students and other outsiders into our 
fruit belt to engage in fruit-picking and packing is an abuse that 
should be stopped at once. These people consume very little, saving 
their money to take back to Ann Arbor, Madison, Champaign, and 
other places from which they come. Thus, while making large sums 
off us, they give little or nothing in support of our industries." 

"The county commissioners should be promptly impeached and 
removed from office for their action of last Monday. We under- 
stand that the contract for the building of the new courthouse was 
let to the Knoxville firm only because their bid was $1,800 under 
that of our fellow-citizen James R. Robertson. Robertson, as we are 
all aware, is an expert at this line of work, and was well equipped 
to do a handsome job. The only excuse which the commissioners 
give is the $1,800. But, against this must be set down the $32,000 
which will be paid to the Knoxville gang. Think of it ! Sending 
$32,000 out of town to save a paltry $1,800." 

"The Gazette has always been outspoken in favor of education. 
Our stand in favor of university, college, and school cannot be ques- 
tioned. We do not wish to question the wisdom of our fellow- 
citizens who are sending their children away to school. But we do 
wish to remind them of a duty which they owe it to the town not 
to neglect. They should see to it that their sons and daughters are 
supplied with clothes and all other necessary articles before they 
leave home for their schools. Our citizens owe nothing to the mer- 
chants of the communities in which these colleges are located. But 



286 CURRENT ECONOMIC PROBLEMS 

they do owe a debt to the town which gives them homes. And they 
should see to it that the money spent for necessary articles is kept 
here as far as possible." 

" 'Now look here, Doc,' said the dollar to the dentist, 'if you'll 
only let me stay in this town, and won't send me to Roars, Sawbuck 
& Co.'s in Chicago for that shaving mug, I'll circulate around and 
do you lots of good. You buy a big beefsteak with me, and the 
butcher will buy groceries, and the grocer will buy dry goods, and 
the dry goods merchant will pay his doctor's bill with me, and the 
doctor will give me to the farmer for oats with which to feed 
his horse, and the farmer will buy fresh beef from the butcher, and 
the butcher will come around to you to get his tooth mended. In the 
long run you see I will be more useful to you here at home than 
if you send me away forever.' " 

"The recent cold spell, which caused a large number of water 
pipes to burst, has been a bonanza for business. Few things in the 
last year have caused so many people to dig down into their jeans 
and cough up. the cartwheels that spell prosperity." 

141. Remember Colorado^ 

The people of Colorado are going to build a wall around the state 
and close the gates this year so that not one dollar of the $200,- 
000,000 which will be received from our crops shall go outside the 
border line. The wall is to be built of a solid unflinching sentiment 
in favor of spending this $200,000,000 at home and making it work 
for our own prosperity. 

The members of the Denver Chamber of Commerce have taken 
their coats off in behalf of the Tunes' s movement and will ask every 
commercial organization in the state to assist. The newspapers of 
the state see in the movement a chance to keep the wheels of in- 
dustry humming in every city, town, and village in Colorado, and 
will join in the campaign. 

"Colorado has a $200,000,000 crop yield this year and this $200, 
000,000 is going to be spent among the merchants, the tradesmen, 
the. manufacturers, and the workingmen of our own state." The 
above is the only platform in this campaign in behalf of a prosperous 
state. Last year we sent some $20,000,000 to eastern mail-order 
houses alone. Half of the value of our crops went outside of the state 
to eastern manufacturers and merchants whose only interest in 
Colorado is to get all the money possible out of its people. It is to 
keep this money in the state and make it work and keep on working 
for our own people that this campaign has been organized. 

^Adapted from a leading article in the Denver Times, of July 31, 1912. 



THE TARIFF PROBLEM 287 

Do you know, Mr. Citizen and Mrs. Housewife, just what it 
means to produce a $200,000,000 harvest in Colorado and keep the 
money at home ? It means prosperity for your grocer, your butcher, 
and your dry goods merchant. It means banks full of money with 
which business can be conducted. It means passenger trains full of 
people instead of empty coaches. It means that the laboring men 
will have jobs and steady salaries and happy homes, well-fed chil- 
dren and smiling wives. 

Every man, woman, and child in Colorado has a part to perform 
in this great work. Buy your shoes, hats, clothing, and underwear 
from your local merchants. Ask them to give you Colorado-made 
products whenever possible. Spend your money for Colorado-made 
agricultural implements, wagons, carriages, and automobiles. Keep 
that $200,000,000 at home! Be selfish — in the sense that you are 
part of the state — for once in your life ! Don't let the East feed on 
the grain while we eat the husks. Don't let the best of that $200,- 
000,000 crop get away from Colorado. 

This campaign is for a richer, better, and greater state. Now 
is the time to begin before the stream of wealth has swept beyond 
our borders. Preach this gospel of Colorado for Colorado ! Organ- 
ize local clubs, wear buttons showing your sentiment, and fight 
for your state. If a half or third of this $200,000,000 is allowed to 
go East this year it will work for the prosperity of other communi- 
ties and leave Colorado in a position where it will have to begin all 
over again. Now that we have it in sight, let's hold on to prosperity 
in the way that will count. 

142. The Seen and the Unseen^ 

BY FREDDRIC BASTIAT 

Have you ever had occasion to witness the fury of the honest 
burgess, Jacques Bonhomme, when his scapegrace son has broken 
a pane of glass? If you have, you cannot fail to have observed that 
all the bystanders, were there thirty of them, lay their heads together 
to offer the unfortunate proprietor this never-failing consolation, 
that there is good in every misfortune, and that such accidents give 
a fillip to trade. Everybody must live. If no windows were broken, 
what would become of the glaziers? Now, this formula of condo- 
lence contains a theory which it is proper to lay hold of in this very 

"Adapted from the essay The Seen and the Unseen, quoted in Walker, 
Political Economy, 321-323. (1850). 



288 CURRENT ECONOMIC PROBLEMS 

simple case, because it is exactly the same theory which unfortu- 
nately governs the greater part of our economic institutions. 

Assuming that' it becomes necessary to expend six francs in 
repairing the damage, if you mean to say that the accident brings 
in six francs to the glazier, and to that extent encourages his trade, 
I grant it fairly and frankly, and admit that you reason justly. 

The glazier arrives, does his work, pockets the money, rubs 
his hands, and blesses the scapegrace son. That is what we see. 

But, if by way of deduction, you come to conclude, as is too often 
done, that it is a good thing to break windows — that it makes money 
circulate — and that encouragement to trade in general is the result, 
I am obliged to cry, Halt ! Your theory stops at what you see, and 
takes no account of what we don't see. 

We don't see that since our burgess has been obliged to spend his 
six francs on one thing, he can no longer spend them on another. 

We don't see that if he had not this pane to replace, he would 
have replaced, for example, his shoes, which are down to the heels ; 
or have placed a new book on his shelf. In short, he would have em- 
ployed his six francs in a way in which he cannot now employ them. 
Let us see, then, how the account stands with trade in general. The 
pane being broken, the glazier's trade is benefited to the extent of six 
francs. That is what we see. 

If the pane had not been broken, the shoemaker's or some other 
trade would have been encouraged to the same extent of six francs. 
This is ivhat we don't see. And if we take into account what we 
don't see, which is a negative fact, as well as what we do see, which 
is a positive fact, we shall discover that trade in general, or the aggre- 
gate of national industry, has no interest, one way or another, 
whether windows are broken or not. 

Let us see again how the account stands with Jacques Bon- 
homme. On the last hypothesis, that of the pane being broken, he 
spends six francs, and gets neither more nor less than he had before, 
namely, the use of a pane of glass. On the other hypothesis, namely, 
that the accident had not happened, he would have expended six 
francs on shoes, and would have had the enjoyment both of the 
shoes and the pane of glass. 

Now, as the good burgess, Jacques Bonhomme, constitutes a 
fraction of society at large, we are forced to conclude that society, 
taken in the aggregate, and after all accounts of labor and enjoyment 
have been squared, has lost the value of the pane of glass which has 
been broken. 



THE TARIFF PROBLEM 289 

D. THE PERENNIAL ARGUMENT FOR RESTRICTION 
143. Gold and Wealth" 

BY MARTIN LUTHER 

Gold has brought us Germans to that pitch that we must needs 
scatter our gold and silver in foreign lands, and make all the world 
rich and ourselves remain beggars. England should indeed have 
less gold, if Germany left her her cloth ; and the king of Portugal also 
would have less if we left him his spices. Reckon thou how much 
money is taken out of German land without need or cause in one 
Frankfort fair, then wilt thou wonder how it comes that there is a 
penny left in Germany. Frankfort is the silver-and-gold hole through 
which everything which sprouts and grows among us, or is coined 
and stamped, runs out of German lands. If this hole were stopped, 
we would perchance not hear the complaint how on all hands there 
is naught but debts and no money, and all provinces and cities are 
burdened and exhausted by interest-paying. 

144. What the State Owes to Industry ^^ 

BY GEORGK B. CURTISS 

History teaches that no nation of modern times has established 
the industrial arts and reared a great manufacturing structure under 
international competition. Our manufacturing industries as well as 
our wondrous industrial and commercial civilization did not come 
out of chaos ; they did not spring into existence and grow by them- 
selves ; they have been established and reared under that system 
of protection which was founded and designed as the architect plans 
a building or an engineer lays out a bridge. We have had no manu- 
factures enumerated in our census returns which were not named in 
our tariff schedules. Our success has not been achieved without 
a constant unremitting struggle. We have gradually grown and. 
expanded our industries by increasing tariff duties and perfecting 
our protective system, and every time we have reduced duties to 
the competitive point our industries have declined and we have gone 
backward. The importers and manufacturers of the. Old World 
even under our protective system, have been a constant menace to 
our growth. The great American industrial fortress, the home 

^"Adapted from the address on "Trade and Usury," in the Ot>en Court, 
XI, 18. Translated by W. H. Carruth. Copyright. (1524.) 

^^ Adapted from a letter written January 7, 1914, accepting an invitation 
to attend the annual meeting of the American Protective Tariff League, 
Published in the American Economist, LIII, 26-27. 



290 CURRENT ECONOMIC PROBLEMS 

market, has ever been under a constant siege. The importers and 
foreign manufacturers have scaled our tariff walls fraudulently to 
supply our people with the wares made by the poorly paid labor 
of the Old World. Congress has finally run up the white flag and 
surrendered the fortress ; it has given to our industrial enemies the 
freedom of our cities. In the great war for industrial and commer- 
cial supremacy which has raged so long in the world of business and 
of commerce, our President has finally intervened in behalf of our 
enemies, and the invading army of the Old World is moving forward 
to subdue and possess our market. 

A hundred million of people in the United States, occupying a 
plane of wages and industrial civilization 150 per cent higher than 
the wage scale and mode of living of three hundred millions of people 
in Europe, by the irresistible force of international competition, are 
to be leveled down to the plane of the Old World. The American 
market, the greatest and most profitable in the world, is offered as 
the price to be fought for in a warfare in which the competitors have 
the unquestionable advantages of millions of experienced, efficient, 
and well-disciplined labor, working at low wages. The final outcome 
of such a struggle does not admit of difference of opinion. The 
economists and statesmen of the world, of all schools of political 
economy, agree that the nation of the higher wage scale and more 
expensive mode of living will be the weaker party in the contest for 
supremacy, and must ultimately succumb to its stronger rival. 

Wages, prices, and mode of living must yield and succumb to 
the leveling process of world-wide competition. There is no friend- 
ship, patriotism, or brotherly love in this contest. The world of 
business is no less selfish and no more altruistic than before. Amer- 
ican consumers will not buy one cent's worth of goods simply because 
they are made in American mills by American labor; they will 
patronize the foreigner if they can save so much as a penny by doing 
it. Our Presidents, even, have changed. We have no Washington 
who took pride in being inaugurated in a suit of clothes made by 
the hands of American labor; nor a Jefferson, who boasted of 
"purchasing nothing foreign where an equivalent of domestic fabric 
can be obtained." 

The leveling process has already begun. The law of gravitation 
of industries to a common world-wide level under competition op- 
erates in the world of business the same as the law of gravitation 
operates in the physical world. The new law has taken effect. Three 
hundred millions of energetic, ambitious, selfish, devouring money- 
getters of the Old World will seize upon every advantage which has 
been devised for them. The fight is on. It is a struggle for the 



THE TARIFF PROBLEM 291 

almighty dollar. The sooner the American people wake up and 
understand the true import and logical effect of what has been done, 
the sooner this stupendous political blunder will be corrected. 

145. The Production of Prosperity^^ 

BY DANlElv DEFOE 

Trade encourages manufacture, prompts invention, employs 
people, increases labor, and pays wages : As the people are employed, 
they are paid, and by that pay are fed, clothed, kept in heart, and 
kept together ; that is, kept at home, kept from wandering in foreign 
countries to seek business, for where the employment is, the people 
will be. 

This keeping the people together is indeed the sum of the whole 
matter, for as they are kept together, they multiply together; and 
the numbers, which by the way are the wealth and strength of the 
nation, increase. 

As the numbers of the people increase, the consumption of 
provisions increases ; as the consumption increases, the rate of 
value will rise at market ; and as the rate of provisions rises, the rents 
of land rise : So the gentlemen are with the first to feel the benefit 
of trade, by the addition to their estates. 

As the consumption of provisions increases, more lands are cul- 
tivated; waste grounds are inclosed, woods are grubbed up, forests 
and common lands are tilled, and improved; by this more farmers 
are brought together, more farmhouses and cottages are built, and 
more trades are called upon to supply the necessary demands of 
husbandry. In a word, as land is employed, the people increase, of 
course, and thus trade sets all the wheels of improvement in motion; 
for from the original of business to this day it appears, that the 
prosperity of a nation rises and falls, just as trade is supported or 
becomes decayed. 

As trade prospers, manufactures increase; as the demand is 
greater or smaller, so also is the quantity made ; and so the wages of 
the poor, the rate of provisions, and the rents and value of the lands 
rise or fall, as I said before. And here the very power and strength 
of the nation is concerned also, for as the value of the lands rises 
or falls, the taxes rise and fall in proportion. 

Trade furnishes money, money pays taxes, and taxes raise 
armies ; and so it may truly be said of trade, that it makes princes 

^"Adapted from A Plan of the English Commerce, 8-10, 33-34, in A 
Select Collection of Scarce and Valuable Tracts on Commerce, edited by 
J. R. McCulloch (1730). 



292 CURRENT ECONOMIC PROBLEMS 

powerful, nations valiant, and the most effeminate people that can- 
not fight for themselves, if they have but money, and can hire other 
people to fight for them, become as formidable as any of their 
neighbors. 

Seeing trade then is the fund of wealth and power, we cannot 
wonder that we see the wisest princes and states anxious and con- 
cerned for the increase of the commerce and trade of their subjects, 
and of the growth of the country, anxious to propagate the sale of 
such goods as are the manufacture of their own people; especially 
such as keep the money of their dominions at home, and on the con- 
trary, for prohibiting the exportation from abroad, of such things 
as are the products of other countries, and of the labor of other 
people, as which carry money back in return. 

Nor can we wonder that we see such princes and states endeavor- 
ing to set up such manufactures in their own countries, which they 
see are successfully and profitably carried on by their neighbors, and 
to endeavor to procure the materials for setting up those manufac- 
tures by all just and profitable methods from other countries. 

146. The Ten Commandments of National Commerce^^ 

1. Never lose sight of the interests of your compatriots or of 
the fatherland. 

2. Do not forget that when you buy a foreign product, no mat- 
ter if it is only a cent's worth, you diminish the fatherland's wealth 
by so much. 

3. Your money should profit only German merchants and 
workmen. 

4. Do not profane German soil, a German house, or a German 
workshop by using foreign machines and tools. 

5. Never allow to be served at your table foreign fruits and 
meat, thus wronging German growers, and, moreover, compromising 
your health because foreign meats are not inspected by German 
sanitary police. 

6. Write on German paper with a German pen and dry the ink 
with German blotters. 

7. You should be clothed only with German goods and should 
wear only German hats. 

8. German flour, German fruits, and German beer alone make 
German strength. 

9. If you do not like the German malted coffee, drink coffee 
from the German colonies. If yoTt prefer chocolates or cocoa for 

^^ Adapted from a circular widely circulated in Germany in 1910. 



THE TARIFF PROBLEM 293 

the children, have a care that the chocolate and cocoa are of exclu- 
sively German production. 

10. Do not let foreign boasters divert you from these sage 
precepts. Be convinced, whatever you may hear, that the best 
products, which are alone worthy of a German citizen, are German 
products. 

147. The Test of Faith^^ 

BY ROSWELI. A. BENEDICT 

Q. . What is Protection? 

A. It is a principle. It holds that home producers alone make, 
and therefore alone own, the home market. 

Q. What is Free Trade f 

A. Also a principle. It holds that producers abroad should be 
allowed to compete for the home market. 

Q. Who are the Protectionists? 

A. Home producers standing by their title to the home market. 

Q. Who are the Free Traders? 

A. Importers and their pals stealing the home market from its 
lawful owners. 

Q. Wherein does the zvork of the Protectionists and the Free 
Traders differ? 

A. The Protectionists make and defend while the Free Traders 
attack and destroy home civilization. 

Q. How do Free Traders destroy home civilization? 

A. They destroy home production which employs the people, 
and so substitute violence for industry as a breadwinning craft. 

Q. After all, are not those who pass Free Trade lazvs merely 
scholars, high minded and pure, moved solely by pride in the com- 
mon weal? 

A. No. It is not pride but price that moves them to sell the 
home market to the Market Robber. Under whatever color or cover, 
it is still the Market Robber's silver paid to these, our Judases, by 
which we are betrayed. 

Q. Who is the Market Robber? 

A. The importer who robs it of its power to employ home pro- 
ducers in the market made and owned by them. 

Q. What is the secret of the Market Robber's power? 

A. Market-robbing booty. His competitor, the home producer, 
is lucky to get 6 per cent a year from his mine, forest, farm, factory, 
or fishery, while the Market Robber's booty may be 100 per cent, 

"Adapted from "A Tariff Catechism," in the American Economist, III, 
62 (1914). 



294 CURREXT ECOXOMIC PROBLEMS 

big enough to bribe his wa}' into an}- market. 

Q. Why did the Market Robber fight so hard to break into our 
market F 

A. To steal bilhons in wages from our home laborers. 

148. The Universal Fruits of Free Trade^" 

BY ANDREW YARRIXGTOX, GEXT 

1. Consider what quantities of fine Linnens are made in Holland 
and Flanders, and here worn and consumed, and how" many hands it 
imploys in work to manufacture it, and the great benefit the Dutch 
gain, being the great Masters of that Trade? 

2. Consider, that if these fine clothes were made here, how it 
would imploy the Poor, raise the price of Land, and keep our Moneys 
at home ; for the Dutch take nothing from us in exchange, wherein 
the Benefit is in any way considerable to the Publick. 

3. Consider, of course, all Linnens bought from France, as Can- 
vases, Lockrums, and great quantities of coarse Clothes, which have 
of late years so crowded upon us, that it hath almost laid aside the 
making of Linn en Cloth in England, and thereby the people are un- 
imployed, and the Land lyeth idle and waste. 

4. Consider, the French take nothing of any value from us, but 
it is ready money for their Linnens ; so we keep their people at work, 
and send them our moneys to pay them for it, and our poor are 
unimploy'd : But if a tax were laid upon their coarse Linnen Clothes, 
then what is brought out of France into England would be made here 
of our own gro^^i:h, to the Nation's great enriching. 

5. Consider the Twine and -Yarn ready wrought and brought 
out of the East-Country to make Sail-Cloth and Cordage, which hath 
taken off the labour of a multitude of people in Suffolk, and there- 
abouts, and hath so lessened that Trade, that it is almost lost : But 
if a tax were laid upon the Threds brought over ready wrought, 
then the Labour of all such things would be here to supply our Poor 
at work, and raise the price of our Lands. 

6. Consider what vast quantities of narrow coarse Clothes come 
out of Germany, and here vented and worn ; the cheapness whereof 
hath beaten out the Linnen Trade formerly made in Lancashire, 
Cheshire, and thereabouts : A tax being laid on these Easterling 
Clothes would occasion the reviving of that coarse Cloth-Trade again 
with us, and would set multitudes at work. 

^"Adapted from England's Improvement by Sea and- Land: To Out-do 
the Dutch without Fighting, to Pay Debts -uAthout Moneys, to Set to Work 
All the Poor of England, etc., 144-146 (1677). 



• 



TEE TARIFF PROBLEM 295 

7. Consider, the Foreign Bed-ticking coming hither cheap, hath 
almost destroyed that Trade in Dorcetshire ; and so the spinners are 
Idle and Land prices fall; and in this, as in other things, we send 
our Moneys into Foreign parts, to keep their Poor at work and sup- 
port them ; and here we star^^ our own, and lose that Trade : A 
Tax upon Foreign Bed-ticking would prevent all this. 

8. Consider the vast and infinite quantities of Thred ready 
spun, that comes down out of Germany into England, and here made 
use of; It is of late discovered that the cheapness of these Threds 
will eat out the ven.^ Spinning in most parts of England; A Tax 
being put upon the Threds would put the Wheel to work in England 
again. This is of great consequence to the Pubiick, to be taken into 
consideration ; for in this \ery thing of spun-yarn, no less than Thirty 
thousand People would be- here imployed, if by Law it were en- 
couraged. 

E. THE CASE FOR PROTECTION 
149. Protection and Industrial Transformation^® 

BY FRIEDRICH LIST 

The transition from the savage to the pastoral, and from the 
pastoral to the agricultural state is \ery efficiently promoted by free 
intercourse among nations. The elevation of an agricultural people 
to the condition of countries at once agricultural, manufacturing, 
and commercial, can only be accomplished under free trade when 
the various nations engaged at the time in manufacturing are in the 
same degree of civilization. 

But some of them, favored by circumstances, having distanced 
others in manufactures, commerce, and navigation, have adopted 
and still persevere in a policy well adapted to give them the monop- 
oly of manufactures, and to impede the progress of less advanced 
nations or those in a lower degree of culture. The measures en- 
forced by such nations are called the protective system. 

The anterior progress of certain nations and foreign commercial 
legislation have compelled inferior nations to look for special means 
of effecting their transition from the agricultural to the manufac- 
turing stage in industr}', and as far as practicable, by a system of 
duties, to restrain their trade with more advanced nations aiming at 
a manufacturing monopoly. The system of import duties is conse- 
quently a natural consequence of the tendency of nations to seek for 

"Adapted from The National System of Political Economy, passim. 
Translated by G. A. Matile (1841). 



296 CURRENT ECONOMIC PROBLEMS 

guarantees of their existence and prosperity, and to establish and 
increase their weight in the scale oi national influence. Such a 
principle is rendered reasonable only so far as it renders easy the 
economical development oi a nation. 

Such restrictions are of the greatest importance because of the 
impetus which they give to the division of labor. Individuals would 
be in vain laborious, economical, ingenious, enterprising, intelligent, 
and moral, without a division of labor, and a cooperation of produc- 
tive power. The principle of the division of labor has been hitherto 
but imperfectly understood. Industrial production depends to a 
great extent upon the moral and material association of individuals 
for a common end. This principle extends to every kind of industry. 

The division of labor and the combination of productive powers 
take place in a nation when the intellectual power is applied so as to 
cooperate freely and efficiently with national production. A merely 
agricultural people, in free intercourse with manufacturing and trad- 
ing nations, will lose a considerable part of their productive power 
and natural resources, which must remain idle and unemployed. It 
can possess neither an important navigation, nor an extensive trade ; 
its prosperity, so far as it results from external commerce, may be 
interrupted, disturbed, or annihilated by foreign legislation or by 
war. 

150. America's Allegiance to Protections^ 

BY AIvBERT J. LI^I^FlNGWElvIv 

I intend to state a few propositions, which, as generally accepted 
facts, appear to me to influence very largely the national acquies- 
cence of America in the protective policy. Perhaps they may be 
heard with more patience from one who' has never had the slightest 
connection with the manufacturing interest; who ought apparently 
to clamor for the cheapest market, but who' is nevertheless, for the 
following reasons, a firm adherent to the protective system: 

I. No country of modern times, which is without manufactures, 
which exports raw products for foreign made goods, and the inhab- 
itants of which are almost wholly engaged in cultivating the soil, 
has succeeded in obtaining wealth, prosperity, and power as a na- 
tion. This simple fact is recognized by every civilized government 
in the world. Free-trade at the present day is either an English 
or a barbarous practice. Even English colonies perceive that they 
must build up their home industries if they are ever tO' gain essential 

^''Adapted from an article in the London Contemporary Review, 
XXXVIII, 56-68 (ir 



THE TARIFF PROBLEM 297 

prosperity. Just so far as Free-Trade contributes to the supremacy 
of British manufactures, it is a means towards the maintenance of 
national wealth and power. If it shall ever cease to do this, it will 
be abandoned. 

2. If, during the past fifty years, America had pennitted a sys- 
tem oif unrestricted trade with all the world, she could never have 
reached the development of her manufactures which has rendered 
her independent ; but would, today, be little more than a huge agri- 
cultural colony, exchanging the produce of her fields for the manu- 
factures and fabrics of Europe. To be a nation of farmers, to ex- 
cell in sheep-raising and in agriculture — this is the English ideal 
of what America ought to content herself with being. If there ex- 
isted between the United States and England a perfectly free and 
open trade, a distribution of industry unfettered by tariffs, England 
would be the manufacturing member, and the United States the 
agricultural member of the partnership. 

3. Under the system of protection America has been able to 
develop her boundless mineral resources, to encourage the growth 
of her manufacturing industries, until, today, she is not merely inde- 
pendent and able to supply her own wants, but she exports to for- 
eign nations, and has begun to compete with England for the mar- 
kets of the world. Conclusive evidence of this exists on all sides. 
The careful observer can not escape it. 

4. A protective tariff has been the most important, and, indeed, 
the essential agent, in the development of the manufacturing indus- 
tries of the United States. This proposition can hardly be seriously 
denied at the present time. ThrO'Ugh the enhanced prices paid at 
first by consumers, manufactures have been created and fostered. 
Perhaps for a while they have been very costly to the nation. But 
of the result the country can well be proud. It has made them inde- 
pendent of other nations for their supplies. And, in the end, with 
growth and improvements, goods have fallen in price, greatly to the 
benefit of the American consumer. 

5. The working class in the United States, under a system of 
protection, enjoy a .greater degree of prosperity than the working 
classes of England under a system of Free-Trade. No' test can be 
more satisfactory and practical than to compare the position of the 
laborer in one country with his position in another ; and, however 
difficult it may seem at first thought to weigh in the balances privi- 
lege, opportunity, comfort, and general prosperity, certain financial 
facts and statistics afford us a tolerably safe method for arriving at 
sound conclusions. That the Avorking man here, if thrifty, has a 



298 CURRENT ECONOMIC PROBLEMS 

far better chance for improving his condition, for educating his fam- 
ily, for acquiring landed property than is the case with his brother 
in Europe is generally admitted. It could not well be otherwise 
where one may so easily exchange the forge or loom for the settler's 
cabin and the plow. The great mass of the American working 
people are better housed, better fed, better clothed, and in all respects 
better situated than the working millions of the nations whose ports 
are open to the world. 

These are some of the reasons which appear to me to largely de- 
termine the persistent allegiance to the doctrine of Protection by the 
people of the United States. Of the ultimate adoption by nations of 
the principles of absolute Free-Trade I have as little doubt as the 
most sanguine disciple of Adam Smith. But it is a dream of the far- 
distant future. It assuredly cannot be realized while the tramp of 
armies is louder than the din of the work-shop. By America, how- 
ever, the day of its adoption may be much nearer our own time. 
History often repeats itself. Like England, by thorough protection 
of our growing industries, we have laid the foundations of success 
in every branch of manufacture. So soon as our preeminence is 
absolutely assured, there will exist no longer the necessity to pro- 
tect. Of that future we have apparently every reason to hope. 
When the production of American skill and industry is found in 
shops in Europe cheaper than their home-made wares, it is probable 
that we shall then take our turn in eulogizing Free-Trade, in open- 
ing our ports to all nations, and in preaching the blessings of unre- 
stricted trade to a reluctant and still doubting world. 

151. Present Validity of the Young-Industry Argument^^ 

BY FRANK WILLIAM TAUSSIG 

The possibility of good results from protective duties in young 
countries is now denied by few. A different question, and one not 
so simple, is whether there is any prospect of gain from protecting 
young industries in a country as fully developed as the United States 
has been since i860; whether, for so robust and full-grown a social 
body as this has become, ridicule is not a sufficient answer, whatever 
the terms in which the argument is stated. In that early formulation 
of the argument which won a respectful hearing from the fair- 
minded, stress was laid on the general conditions of the country im- 

^^Adapted from Some Aspects of the Tariff Question, 20-23. Copyright 
by Harvard University Press (1915). The practical validity of the argu- 
ment, with reference to particular commodities, is discussed in succeeding 
chapters of the book. 



THE TARIFF PROBLEM 299 

posing protective duties. It was a young country that was spoken of 
by Mill, rather than one having young industries. List's well-known 
plea rested on the doctrine of stages in economic evolution — on the 
inevitableness of the transition from the agricultural and extractive 
stage to the manufacturing stage, and on the advantages of protective 
duties for furthering and easing the transition. He found the United 
States in this stage of development when he was sojourning here 
during the period of our early protective movement. On his return 
to Germany he found his own country in a similar stage, and 
agitated for nurturing protection there also. But does the same 
possibility exist when this period of transition is past, when the 
manufacturing stage has been fairly entered, when the question no 
longer is whether manufacturing industries shall be established at all, 
but whether some particular kinds of manufactures shall be added to 
others already flourishing? 

I am disposed to admit that there is scope for protection to young 
industries even in such a later stage of development. Any period 
of transition and of great industrial change may present the oppor- 
tunity. No doubt the obstacles to new ventures were greater during 
the first half of the nineteenth century than they have come to be in 
the modern period. The general diffusion of technical knowledge 
and technical training, the lessening of secrecy in trade processes 
which is the inevitable result of large-scale operations, the greater 
plenty of expert mechanics and machinists — all these factors tend to 
facilitate the establishment of industries whose difficulties are no 
more than temporary and transitional. 

None the less the early stage of any new industry remains diffi- 
cult. In every direction economists have come to recognize the 
immense force of custom and routine, even in countries where 
mobility and enterprise are at the highest. Departure from the 
habitual paths of industry brings unexpected problems and diffi- 
culties, false starts and initial losses, often a fruitless imitation of 
familiar processes before new and better ones are devised. All this 
is made more trying when a young competitor is trying to enter the 
market against a producer who is established and well equipped. 
The obstacles in the way of promising industries, though doubtless 
not so great as they were a century ago, remain great. The experi- 
ences of the United States during the. last fifty years indicate that 
there remains in modern times at least the possibility of acquiring a 
self-sustaining industry by aid during the early stages. 

The most striking cases in which success of this sort may be 
fairly alleged to have been secured are those of industries quite new 
— not existing at all at the time when the protective duty ^as 



300 CURRENT ECONOMIC PROBLEMS 

imposed. Where an industry is already started, or where there exist 
others closely related, further extension may be expected to take 
place, if the conditions are really favorable, without any legislative 
stimulus. If a silk manufacture already is established, the develop- 
ment of new branches of silk-making is not likely to meet with the 
special obstacles to young industries. And if, none the less, protec- 
tion has been applied, and if thereafter a self-sustaining additional 
branch of the manufacture has grown up, the question at once pre- 
sents itself. Would not the same growth have ensued in any case, 
and was the protection needed? Such skepticism, however, would 
hardly be justified if there had been no silk manufacture of any sort 
before the protection was applied. Precisely this outcome — the 
establishment of an industry entirely new — has appeared under our 
duties on silks during the last half-century. Without these duties it 
is doubtful whether there would have been any silk manufacture at 
all. And if in course of time that manufacture proved capable of 
supplying its products more cheaply than those imported, or at least 
as cheaply, the presumption would be strong that a new industry had 
been successfully nurtured. In the case of worsteds, also, there was 
virtually no industry at all before the Civil War; it has grown up 
under the barrier of protection. The same thing has happened with 
plate glass, and with many another commodity. In such cases, if 
eventual independence has been achieved, it may be fairly said that 
protection was applied to an industry really young. 

Further: the length of time to be allowed for the experiment 
should not be too brief. Ten years are not enough ; twenty years 
may be reasonably extended; thirty years are not necessarily un- 
reasonable. What has already been said of the tenacity of old habits 
and the difficulties of new enterprises justifies the contention that a 
generation, more or less, may elapse before it is clear whether success 
has been really attained. 

Nevertheless, in the end the final test must be applied — can the 
industry, after a period not unreasonably long, maintain itself un- 
aided? The gist of the young-industry argument is that the com- 
munity bears an initial charge for the sake of an eventual gain. That 
gain is secured only if the community is finally supplied with its 
goods as cheaply as the displaced foreigner could supply it. The 
young industry must mature, so fully as to sustain itself. The final 
test would seem to be indifference to the continuance of the duty 
and willingness to meet foreign competition on even terms. If the 
industry continues to need protection indefinitely, and never succeeds 
in ofifering its products as cheaply as they could be got by importa- 
tion, then its protection cannot be defended on this plea. There 



THE TARIFF PROBLEM 301 

may be good pleas on political or social or military grounds ; or the 
stock arguments about home labor and home markets and the "acqui- 
sition" of valuable industries may be repeated ; but there can be no 
pretense that a young industry has been nurtured with success. 

152. Protection and the Formation of CapitaP^ 

BY ALVIN S. JOHNSON 

The additions to the capital of a nation must come from the 
annual income. That the income of a nation will, at any given time, 
attain its maximum under freedom of trade is a proposition that 
admits of only rare exceptions. Does it not then follow that the 
capacity of a nation to accumulate capital will be greater under free 
trade than under protection? If all classes in society saved equal 
proportions of their incomes, it would follow of necessity that what- 
ever tends to reduce the national income must reduce the annual 
addition to the fund of capital. But, in fact, the disposition to accu- 
mulate capital varies widely in the different classes that compose a 
nation ; and it is the essence of protection to alter the proportions in 
which the social income is distributed. We cannot, therefore, accept 
without further examination the view that protection and the conse- 
quent reduction of the social income must necessarily retard the ac- 
cumulation of capital. 

Apart from purely individual differences in thrift, the tendency 
to save is affected by general economic and social conditions that en- 
able us to divide the members of society into more or less distinct 
thrift classes. A man is not likely to save, if he knows of no invest- 
ment attractive to him ; he is not very likely to save if the road to the 
esteem of his fellows lies through expenditures for consumption. 

The most attractive form of investment is the acquisition of 
tangible capital goods to be employed under one's own control. 
Such an investment gives visible evidences of economic efficiency. 
Accordingly those who are in a position to make such investments 
have the strongest incentive to save. These persons are entrepre- 
neurs who have not yet full}^ equipped their businesses with capital. 
Them we ma}' place in our highest thrift class. We may assign to a 
lower thrift class those who live upon salaries or returns from pro- 
fessional service. They have no ever-present means of investment ; 
they are under the domination of rigid standards of consumption. 

^"Adapted from an article in the Political Science Quarterly, XXIII, 
221-241. Copyright (1908). 



302 CURRENT ECONOMIC PROBLEMS 

They must, however, make provision for disability or superannua- 
tion. In 'a yet lower class I should place those who derive their in- 
comes from rents, interest on mortgages and bonds, dividends on 
stocks, — the funded income class. They are in no peculiarly favor- 
able situation to m^ake new investments; they are subject to rigid 
standards of consumption; and they are under no compulsion to set 
aside a portion of their incomes for future needs. In the lowest 
class of all I place the great mass oi workingmen, since they have 
the least favorable opportunity for investment and are subject to the 
most tyrannical standards of consumption. 

When an industry reaches the acme of development, the position 
of the independent entrepreneur becomes assimilated to that of the 
recipient of funded income. Accordingly we are justified in draw- 
ing a distinction between the entrepreneur engaged in an industry 
which quickly attains its full development and those engaged in an 
industry of practically unlimited development. Thus we arrive at 
the conclusion that the richest and most enduring sources of new 
capital are the interest and profits of the manufacturing entrepre- 
neur class. 

A practical tariff system cannot bestow all its benefits upon a 
higher thrift class and impose all its burdens upon a lower one. Nev- 
ertheless it can hardly be denied that the chief benefits of modern 
protectionism have been bestowed upon those engaged in capitalistic 
enterprise. In the United States protection, down to the present day, 
has meant .little but the diversion of income from all other classes 
in society to the capitalist manufacturer. The farmer and wage- 
earner have carried a net burden ; the manufacturer alone has se- 
cured a net gain. Here a rapidly developing agriculture has been 
taxed for the benefit of rapidly developing manufactures. Although, 
under these conditions a high thrift class has been taxed, agricul- 
ture would quickly have attained a state oi full development, and 
thus would have ceased to give large incentive to thrift. The im- 
petus given to manufactures, which under modern conditions pos- 
sess almost unlimited power of absorbing capital, must, of itself, 
have accelerated accumulation. It is worth noting that in the long 
run protection in a democratic state must favor the higher thrift 
classes at the expense of the lower. In every state protection is 
essentially a minority interest. The export industries can gain noth- 
ing from the policy ; industries that supply a purely local demand also 
gain nothing. These two groups O'f industries outweigh the indus- 
tries which would suffer under competition. The number of persons 
whose incomes are diminished by protection will greatly exceed the 
number of persons whose incomes are enlarged by it. 



THE TARIFF PROBLEM 303 

If it is true that the general tendency of modern protection has 
been to divert income from a lower to a higher thrift class we are 
justified in saying that protective duties have played a part in equip- 
ing modern society with the vast stock of capital goods which it 
now possesses. For proof of this we must have recourse to an analy- 
sis of the effects of protection upon capital formation in concrete 
instances. Let us suppose that in a country which formerly im- 
ported its silk a heavy duty is levied with the object of creating a 
silk-manufacturing industry at ho^me. Men, intending to invest 
otherwise, are induced to go into the silk business. At the begin- 
ning the capital goods with which the new industry is equipped rep- 
resent no net addition to the productive wiealth O'f the country. But 
a new industry is naturally speculative in character; and the more 
conservative entrepreneurs are slow to enter it. In the nature of the 
case the industry will be undersupplied with capital. This means 
that capital will be more than ordinarily productive in the industry ; 
it means further that entrepreneurs will be steadily endeavoring to 
secure more capital to expand their operations. Under these cir- 
cumstances it is inevitable that a large proportion of the profits cre- 
ated by the industry will be reinvested in it. Here then we have a 
net addition to the productive wealth of the country. 

We arrive at practically the same result if we select a commodity 
entering chiefly into the consumption of the wage-earners. A large 
proportion of the wage-earning class saves practically nothing, 
whether wages are high or low. Standards of consumption tend to 
absorb any surplus income that may appear. A duty borne by the 
wage-earning class places little check upon accumulation. Thus the 
main effect of the duty is to divert income from a lower thrift class 
to a higher one, and hence tO' give an impetus to the formation of 
capital. 

In answer to this line of argument it is alleged that a tariff con- 
structed in such a way as to equalize costs of production at home and 
abroad would not permit the surplus profits out of which capital is 
built. This is true. But one miay safely challenge all the economists 
in the world to point to one instance of a "scientific" tariff. In the 
nature of things there can be no such tariff. What manufacturers' 
association would conduct political campaigns, roll logs, and other- 
wise exert itself for the mere privilege of being placed on an equal- 
ity with the foreigner? What would be the object in establishing 
a new industiy if it were tO' offer only profits that might be secured 
from industries already existing? 

It is true that if the protected industry operates under great nat- 
ural disadvantages, as in the classical case of producing wine in 



304 CURRENT ECONOMIC PROBLEMS 

Scotland, the burden to- the consumer will be so much greater than 
the net gain of the producer that the net effect upon accumulation 
will be unfavorable. But it is not the practice of entrepreneurs to 
demand, nor of statesmen to grant, protection for industries that 
labor under extraordinary disadvantages. Rather the selection of 
industries for protection tends to be such that a greater part of the 
tribute exacted from the consumer is bestowed upon the producer in 
the form of profit instead of being wasted in the insane struggle with 
refractory natural conditions. 

What is the test by which it can be determined whether the pro- 
tective system shall be abandoned? By the academic protectionists, 
duties should be abolished when the protected industries are in a po- 
sition to meet foreign competition. According tO' the theory here 
put forth, they should not be removed until the protected industries 
cease to develop rapidly. Then the duty should be removed whether 
the industry can meet foreign competition or not. 

153. The Economics of Protection 

The economic fallacy of free trade lies, not in its logic, but in its 
•assumptions. The latter are part and parcel of the static and indi- 
vidualistic system of thought of the later eighteenth century which 
made Nature the hero in the piece and assigned to the state the role 
of villain. At the basis of the argument for free trade are the two 
quite dissimilar but complementary propositions that men are guided 
by a supreme natural pre-wisdom to choose the best lines of pro- 
duction, and that the process of production consists in juggling 
together a certain number of productive units from each of three 
great hoppers, called Land, Labor, and Capital. To make clear the 
dependence of the theory upon these underlying assumptions, let us 
strip it of its verbiage and reduce it to its simplest terms. 

It may best be stated as a problem : Given a definite amount of 
land, of capital, and of labor ; in what particular permutations shall 
the three be put up in such a way as to secure the largest amount of 
consumptive goods? Obviously, since labor and capital are the 
human factors, they must be economized; their supplies must be 
made to "go as far as possible." This can be done by making Nature 
shoulder the largest possible amount of the actual work of produc- 
tion. This last can be achieved by having each article produced in 
the place best fitted for its production, and letting the peoples of the 
various places exchange their surpluses. In other words, the best 
possible adjustment of the mobile factors of labor and capital must 
be made to the immobile factor, land. To illustrate, an attempt 



THE TARIFF PROBLEM 305 

should not be made to produce both watches and oranges in Con- 
necticut or Florida. With the available but limited amounts of labor 
and capital a larger quantity, both of watches and of oranges, can 
be produced, if Connecticut devotes itself to the production of 
watches and Florida to the cultivation of oranges, than if each tries 
to produce for itself both of these commodities. If, then, the gov- 
ernment does not interpose artificial restrictions, a scheme of profits 
and losses will secure the localization of industries at places best 
fitted for them. Consequently a larger amount of consumable goods 
will be produced under free trade than under a restrictive system. 
The theory might properly be called the law of the economic utiliza- 
tion of labor and capital. 

In view of this statement the weakness in the assumptions of the 
argument will quickly be noted. The first is the preconception of the 
rationality of human judgment in the localization of industry. It 
imputes omniscience to that judgment; for the decision has to be 
made before the industry is located ; and the evidence to guide that 
judgment, in profits and losses, is not available until much later. At 
best, rational judgment can locate industries at points where Nature's 
contribution can be most fully utilized only after a protracted and 
costly period of experimentation. It is doubtful, too, whether the 
owners of natural resources, who have had little experience with the 
larger world of affairs, can determine just what industries are 
adapted to a given locality. If they are left alone, custom is likely 
to ripen into the inertia that breeds stagnation. Further, because of 
the intricacy of the industrial cycle and the imperfection and lack 
of availability of business barometers, it is impossible for the average 
business man- to look into the future and see all the exigencies which 
converge to make a business a success or a failure. No one expert 
is sufficient for this task. Technical experts who know all the po- 
tential productive capacities of a particular place need to be assisted 
by business experts who are able to forecast demand and general 
business conditions. A group of them should, by the use of scientific 
methods, determine the industrial needs that are most pressing and 
the localities best adapted to the production of articles to satisfy 
these needs. Encouragement should be given, if conditions are 
favorable, to the prosecution of various businesses. Towards this 
end the protective tariff should prove a most useful device. 

The second glaring error in the assumptions is a conception of 
potential resources in fixed terms. The elements out of which useful 
goods are made are most valuable. Our natural resources are what; 
they are, because our industrial system is what it is. Change the 
system, and the catalogue of our resources would be materially 



3o6 CURRENT ECONOMIC PROBLEMS 

altered. In a sense China's wealth is far greater than Japan's, yet 
it lacks a certain almost indefinable dynamic quality. Labor, particu- 
larly, defies expression in rigid calculable terms. Man is possessed 
of many potential gifts. The majority of these always remain latent ; 
some two or three are developed. Take a boy from a rural environ- 
ment, where possibilities are narrowly circumscribed, to a large city 
and watch unsuspected talents develop. Physically speaking, the 
amount of land, capital, and labor may remain the same. Each as it 
is, as a static thing, may be best utilized under free trade. But the 
important question is. Does society under free trade develop the most 
important latent capacities ? Does free trade permit society to utilize 
its full capacity for development? The worst that is said about 
protection is that for a time it imposes higher prices upon consumers' 
goods. Admit the charge. Its cost is far more than offset by its 
transformation of society into a more complex and integrated whole, 
which offers a larger range of opportunity to the mdividual, and 
surrounds him with an atmosphere surcharged with a spirit that 
brings out his latent powers. Again, the fallacy of free trade is that 
it overlooks the possibility of developing new capacities for produc- 
tive work. 

The third glaring error is, in a sense, of a kind with the second. 
It is the assumption of a fixed quantity of each of the productive 
factors. Our own experience has demonstrated quite clearly the 
possibility of greatly increasing two of these factors, labor and 
capital, and in a way increasing the third, land, by the creation of an 
industrial system that allows a fuller utilization of natural resources. 
In the argument above, labor was the important factor ; here capital 
takes the first place. The importance of a definite increase in the 
volume of capital is not clearly enough appreciated. Land, of course, 
physically speaking, is fixed in quantity. If a nation has reached 
the point of diminishing returns, an increase in numbers is attended 
by a fall in the standard of living. Material progress, then, is asso- 
ciated with an increase in the quantity of capital. Protection, as 
Professor Johnson has shown in another reading, increases for pro- 
tected businesses the margins between costs and selling prices. A 
large part of the additional profits realized is turned back into the 
business in the form of reinvested capital. The growth of an in- 
dustry is closely dependent upon its control by a permanent man- 
agement who have vast pecuniary stakes in its success. This is 
possible only under a system which permits expansion through 
reinvestment of profits-. This protection makes possible. The 
alternative, involving the investment of outside capital in the busi- 
ness, can be taken only at the cost of a sacrifice of part of the 



THE TARIFF PROBLEM 307 

ownership, and, consequently, of the control of the enterprise. Since, 
therefore, material progress is dependent upon the addition of new- 
increments to the available supply of capital, its debt to protection is 
a large one. 

Since protection increases the amount of invested capital, it 
follows that it increases the incomes of the mass of individuals. The 
argument is perhaps already evident, but let us state it, at least for 
the most important share in distribution, that of labor. As political 
economists agree, the wages of labor depend upon the marginal 
productivity of the laborer. Capital increases that productivity, and 
consequently raises wages. To illustrate, let us take two countries, 
Denland and Norland. They possess the same number of laborers, 
similar natural resources, the same technical system, and the same 
amount of accumulated capital. It is evident that under our principle, 
the real wages will be the same in the two countries. If, however, 
Denland differs from Norland only in having a larger amount of 
accumulated capital, then the marginal laborer in that country is 
working with improved equipment, and will turn out a larger product 
than the marginal laborer in Norland. Accordingly wages will be 
higher. Likewise, an increase in accumulated capital in Norland 
itself improves the facilities with which the marginal laborer works, 
and consequently increases his product and his wage. Under pro- 
tection, therefore, wages will be higher than under free trade. 

Protection, as a system, has seemed to the economists to lack a 
fundamental basis only because they have insisted upon judging it 
on the basis of the static and individualistic assumptions underlying 
their own creeds. We must remember that free trade is a theory of 
the proper utilization of definitely limited factors of production. 
Protection is a theory of the development out of crude human stuff 
and natural resources of the largest possible productive funds and of 
the best conservation of these funds. It goes back of the factors of 
production, the starting-point of the free trader, and seeks to increase 
their size and intensify their force. When development stops, and 
society becomes static, then it will be to our advantage^to adopt the 
free-trade theory of maximum utilization. But so long as industrial 
society possesses capacity for growth, we can best profit by clinging 
to the use of the developmental theory of protection. _ 

154. Protection and the National Defense 

Until a few months ago it was conventional to insist that even the 
partial free trade which has been attained in the Western world has 
caused the war-drum to throb no longer. The argument was rational, 
and since it was assumed, for some unknown reason, that man's 



3o8 CURRENT ECONOMIC PROBLEMS 

actions were rational, it was quite convincing. It ran something like 
this : The actions of nations, like those of individuals, are premised 
upon a desire to realize the highest measure of material welfare. 
States are, therefore, likely to do those things which lead to an 
increase in welfare, and to leave undone those things which seriously 
threaten it. Now commerce ties industrial countries together with 
bonds of common pecuniary interests. So close are these and so 
intricate is the scheme of pecuniary interests which is created, that 
anything which breaks the commercial nexus seriously threatens the 
profits and material welfare of capitalists and laborers alike in many 
industries in many countries. Because these relations are not of 
dependence, but rather of interdependence, nations cannot afford to 
fight. The antipathy to fighting is strengthened by the prominence 
of commercial opinion in determining national policy. On the con- 
trary the gains from war are illusory. Increases in territory are 
nominal rather than real. They are attended by no great increase 
in material welfare. Indemnities do not repay their cost of collection. 
Loot is a breach of the ethics of warfare. Consequently the partial 
free trade of the present is an excellent investment in peace insur- 
ance. 

Unfortunately, however, the events of the last few months have 
proved that the wisdom of nations does not reside in the rational 
calculations of ledgers. The pecuniary fact has as yet completely 
conquered neither the statesman nor the man in the street sufficiently 
to make economics the basis of national action. Instinct and impulse 
are still associated with rationality in political judgment. Race and 
creed and politics are still matters of concern. The pocketbook has 
not mastered hate, and the bank-ledger has not as yet won the 
victory over jealousy. Accordingly, the European conflict teaches 
quite clearly that, whatever may be rational, there is more than a 
possibility that a nation may find itself suddenly at war. 

The supreme national duty, then, is to be ready for war. In this 
preparation the tariff policy is a matter of the greatest moment. 
Clearly, whatever may be our disadvantage, it will not do to depend 
upon a foreign source of supply for munitions of war. A navy alone 
may stand between us and that source. Should the fleet be defeated, 
there would be no chance for us to save ourselves. But only a 
moment's reflection is necessary to show that, even if we manu- 
facture our own munitions, it is equally necessary that we produce 
the raw materials out of which they are to be made. The cutting 
off of a single essential raw material would prove fatal. To muni- 
tions must be added all that long list of articles which, under modern 
conditions, are essential to the successful conduct of the war. Sol- 



THE TARIFF PROBLEM 309 

diers, if they are expected to win battles, must be properly fed, 
clothed, and housed. We can depend upon the caprice of import 
for no article essential to their personal efficiency. We must also 
have many auxiliary articles and devices upon which the success of 
the force as a fighting unit depends. These include horses, automo- 
biles, gasoline, copper, steel, drugs, chemicals, and innumerable other 
things. Our transportation system, too, must be prepared to meet 
mihtary exigencies. In short, war practically involves, as it is 
carried on under the modern machine process, making the whole 
industrial system function toward military efficiency. War comes 
unexpectedly. An industry, on the contrary, cannot be quickly 
started. Time and experimentation are necessary to make it fit into 
a complicated industrial scheme. Consequently industries which 
supply every essential article required in war must be built up to high 
efficiency in time of peace. At best we can expect only a few 
industries to be built up in just the right way in response to the 
capricious demand of pecuniary profit. A use, and a very extensive 
use of protection is, therefore, necessary, to prepare a nation for 
the acute stress that may mean life or death. 

F. THE INFLUENCE OF THE TARIFF ON WAGES 
155- High Wages an Obstacle to Manufacture^" 

BY DANIE;!. WEBSTER 

The present price of iron at Stockholm is not far from $40.00 at 
the mines. Freight, insurance, and duty make the price of Swedish 
iron in our market about $83.00. We perceive by this that the cost 
of the iron is doubled in reaching us from the mine in which it is 
produced. Why, then, cannot iron be manufactured at home? Our 
ore is as good, or better. Nothing could be more sure of a constant 
sale. It is an article of absolute permanent necessity. 

Sir, the true explanation seems to me to lie in the present prices 
of labor. I think it would cost us precisely that which we could 
worst afford, that is, great labor. The principal ingredient in the 
cost of bar iron is labor. Of manual labor, no nation has more than 
a certain quantity, nor can it be increased at will. As to some opera- 
tions, indeed, its place may be supplied by machinery ; but there are 
other services which machinery cannot perform for it, and which it 
must perform for itself. A most important question for every nation 
is how it can best apply that quantity of labor which it is able to 

""Adapted from a speech delivered in the House of Representatives, 
April I and 2, 1824. 



3IO CURRENT ECONOMIC PROBLEMS 

perform. Labor is the great producer of wealth; it moves all other 
causes. If we call machinery to its aid, it is still employed, not only 
in using the machinery, but in making it. Now, with respect to the 
quantity of labor different nations are differently circumstanced. 
Some need, more than anything, work for hands ; others require 
hands for work; and if we ourselves are not absolutely in the latter 
class, we are still, most fortunately, very near it. I cannot find that 
we have idle hands. The price of labor is a conclusive and unanswer- 
able refutation of that idea; it is known to be higher with us than 
in any civilized state, and this is the greatest of all proofs of general 
happiness. Labor in this country is independent and proud. It has 
not to ask the patronage of capital, but capital solicits the aid of 
labor. This is the general truth in regard to the conditions of our 
whole population. The mere capacity to labor in common agricul- 
tural employments gives to our young men the assurance of inde- 
pendence. We have been asked whether we will allow the serfs of 
Russia and Sweden the benefit of making iron for us ? Those same 
serfs, sir, do not make more than seven cents a day, and they work 
in these mines for that compensation because they are serfs. Have 
we any labor in this country that cannot be better employed than in 
a business which does not yield the laborer more than seven cents a 
day? This, it appears to me is the true question for our considera- 
tion. There is no reason for saying that we will work iron because 
we have the mountains that contain the ore. We might for the same 
reason dig among our rocks for the scattered grains of gold and 
silver which might be found there. 

156. Protection and High Wages^^ 

Not only are wages in the United States twice or three times the 
averages of Europe and from ten to twenty times those of Asiatic 
countries, but our hours of labor are the fewest in the world. 

So far as can be learned from a rough computation of the avei^ 
ages in the United States, the American laborer now gets fully $2.50 
per day in a week of 54 hours' work. If we should take the average 
of all men, women, and children wage-earners, in this country, it 
would be well beyond the dollar-a-day line. 

The question then follows : Is not the cost of living proportion- 
ally more here than abroad? There is very little difference, the 
same things considered, but the American lives much better and his 
needs are far in excess of the foreigner's because of his education, 
his intelligence, and his tastes. The American two-dollar-a-day man 

"^Adapted from "Wages and Causes," in the American Economist, 
XXVIII, 175 (1901). 



THE TARIFF PROBLEM 311 

not only gets a better living for himself and his family than the 
European dollar-a-day man, but the American has another dollar for 
comforts, conveniences, luxuries, and pleasures unknown to the 
European laborer. 

There must be some reason for this state of affairs, and this 
reason is the American system of protection. That system tends to 
make us do practically all our own work, keeping our money at 
home and in constant circulation, creating and sustaining a purchas- 
ing ability that demands more and more production, the very pro- 
ducers becoming greater consumers of each other's products. 

We are not an agricultural people. We are not a manufacturing 
people. We are not a mining people. Nor are we fishermen or 
foresters. We are productive people, and our productions include 
every need of man and nearly every luxury. Our small surplus is 
readily sold abroad, and to a greater extent than our purchases. 

This is the American system of protection. This is the reason for 
American wages and the cause of American habits and ways of 
living. Our diversification of production is the greatest economic 
leaven of our almost immeasurable loaf of prosperity. There is 
only one thing that will permanently lessen it — a reduction of wages 
made necessary by a repeal of one or more tariff schedules bringing 
us into competition with the dollar-a-day .labor of Europe and the 
d'ime-a-day labor of Asia. Nor does the whole chain of interde- 
pendent industries have to be broken. The breaking of a single link 
will work irreparable disaster. We must preserve intact our splendid 
American policy of protection and its attendant high wages and 
universal prosperity. 

157. The Effect of Industrial Changes on Wages^" 

BY ALVIN S. JOHNSON 

A policy that drafiw labor from the fields that are of greater nat- 
ural productiveness to Uelds of lower natural prodvictiveness tends 
to reduce wages. 

In any country wages are determined by the marginal productiv- 
ity of labor. We will represent the various opportunities of employ- 
ment that a country like the United States affords by the symbols, 
A, B, C, and D. A may stand for a group of industries in which 
we have exceptional advantages over foreign countries. B stands 
for a group of industries in which our advantages are less, C one 
in which they are still less, and D the group of industries in which 

""Adapted from Introduction to Economics, 359-361. Copyright by D. 
C. Heath & Co. (1909). 



312 CURRENT ECONOMIC PROBLEMS 

they are least of all. When bur population is so small that all our 
labor can be engaged in the group represented by A, wages will be 
at their maximum. When our population increases so that some 
of the labor will have to be set to work in group B, the wages of 
all labor must decline to the level of the productivity in that group. 
We will suppose that population has increased up to a point where 
the opportunities represented by A and B are fairly well manned, 
and wages are determined by the productivity of labor in B. 

With wages thus determined, it is clear that no employer, with- 
out governmental aid, can afford to hire labor to exploit the oppor- 
tunities represented by C and D. This would necessitate paying 
labor in C and D as much as it produces in B, and that by hypothe- 
sis is more than it produces in C and D. 

Now let us suppose that a political party is in power which holds 
the belief that we should produce everything that we consume, that 
is, that the opportunities represented by C and D should be exploited 
as well as those represented by A and B. Labor may be 
drawn away from A and B. This involves the necessity of 
compensating entrepreneurs in some way for the disadvantages 
imder which they will operate in C and D. Either wages must 
be reduced in A and B, or some form of subsidy must be granted 
to C and D. 

The commodities that the industries composing C and D will 
produce have been hitherto, we assume, obtained from abroad 
through exchange for commodities produced by A and B. The gov- 
ernment now renders this difficult by placing high duties upon the 
former class of commodities. This means that producers in the 
groups A and B — both employers and workmen — must pay higher 
prices for what they buy. They do not receive higher prices for 
what they sell ; in fact, they receive lower prices, as this, we have 
seen, is the effect of protective duties upon export industries. It ap- 
pears, then, tjhat part of the disadvantage of producers in C and D 
is removec^y reducing wages in A and B. 

After the duty has gone into effect and the prices of commodi- 
ties that can be produced by C and D have risen sufficiently, en- 
terprisers will be able to hire labor at the wages prevailing in A 
and B, and establish industries in C and D. So' far as the remain- 
ing laborers in A and B buy the products of C and D, the differ- 
ence between the price which they pay for those products and the 
price that they would pay if they were permitted to import those 
products duty-free is a tax paid not tO' the government, but to the 
producers in C and D, to enable the latter to remain in business. 
It is an uncompensated deduction from the natural earnings of the 



THE TARIFF PROBLEM 313 

laborers in A and B. Their wages have been reduced. Nor are 
the workers in C and D paid as much, estimated in purchasing 
power, as they would have received if they had been allowed to 
remain in A and B under the earlier conditions. The net effect 
of the imposition of the duty has been to saddle the self-supporting 
industries, A and B, with the support of the pauper industries, C 
and D. Yet the inventors of this policy have the effrontery to 
tell laborers in A and B that this policy is the bulwark of their 
high rate of wages ! 

The principles involved in the illustration may be stated in the 
following general terms: Wages in any country will be at the high- 
est point when all the labor of that country is concentrated in the 
industries in which its relative advantag'es over other countries 
are greatest. If there are no protective duties whatsoever, em- 
ployers will, as a rule, seek out the industries in which their country 
has the greatest relative advantages. Protective duties enable 
other industries to exist, but only through taxing the more pro- 
ductive industries for their support. Protection as a permanent 
policy means a slight reduction of money wages, and a greater 
reduction in wages estimated in purchasing power. 



G. THE HISTORICAL SETTING OF THE CURRENT 
TARIFF PROBLEM 

158. A Half-Century of Tariff History-' 

BY HARRISON S. SMAI.IvE;y 

A study of the historical setting of the current tariff problem 
need not take us back beyond the period of the Civil War. True, 
the tariff had played a part in politics from the beginning, a part out 
of all proportion to its real importance. For the first quarter-century 
of our national existence the idea of protection had found but 
precarious foothold in our tariff schedules. However, the natural 
protection furnished by the Napoleonic wars had resulted in the 
establishment of many manufacturing industries, which had pro- 
ceeded to make their presence known immediately the war was over. 
The result had been a series of bills granting relatively high duties 
from 1819 and 1824 until 1846. However, the South had opposed, 
and the high level of duties had, even in those days, been subject to 
many vicissitudes. From 1846 until the Civil War the dominant 

^^Adapted from "A Short Sketch of American Tariff History," in Read- 
ings in Political Economy. Privately published (1911). 



314 CURRENT ECONOMIC PROBLEMS 

theory underlying tariff policy had been that of revenue, but pro- 
tective features had not been entirely abandoned. However, as we 
have said, the present era properly begins with the Civil War.^* 

The Morrill law, passed in 1861, raised the level of duties quite 
substantially. Modifications in duties were constantly being made 
throughout the conflict, and in the end the level of duties was very 
greatly raised. 

Although the idea of protection was quite prominent, the primary 
reason for the increase was the need of revenue. The government 
had adopted a most elaborate policy of internal taxation, including 
taxes on manufactured goods. It seemed just, therefore, since 
American producers were burdened with excise duties greatly in- 
creasing their costs of production, to protect them by a proportionally 
higher tariff duty. In fact, had this not been done, the government's 
attempt to collect revenue in many cases would have failed. Ac- 
cordingly many "compensating duties" were added to the already 
high rates. This level was still further raised through the efforts of 
designing congressmen, who found it easy to secure duties for 
favored industries under the pretense of raising revenue. 

During the war no one imagined that the excessive duties would 
be permanent. But the war passed, and tariffs have come and gone, 
but still we have a general level of duties about like that which 
prevailed at the end of the war. Soon after hostilities ceased Con- 
gress began to repeal the special internal revenue duties. But the 
compensating duties, made necessary by these, were not taken off. 
So today we are still paying many special duties designed to com- 
pensate manufacturers for duties which have not been levied upon 
them for forty years. 

Several reasons may be assigned for the failure of Congress 
to reduce the war tariff after the close of the conflict. Its attention 
was largely drawn to the problems of reconstruction in comparison 
with which the tariff was a minor issue. Again, Southern opinion, 
which alone was favorable to free trade, was not strong. Further- 
more, the tariff was in a state of great confusion, and its intelligent 
revision would have required a great deal of time and care. Still 
another factor of a political character was probably of considerable 
consequence. The Republican party had been organized as a pro- 
test against the spread of slavery. With the successful termination 
of the Civil War its object was accomplished. Hence it was left 
without a special reason for its continued existence. If the party 
was to remain a force in politics it must have a positive platform 

"*Mr. Smalley is not responsible for the opening paragraph. 



THE TARIFF PROBLEM 315 

on which to stand. So the Republican leaders seized upon protec- 
tion and made it one oi their leading policies. But most important 
of all, the protected interests exerted in the congressional lobbies a 
powerful influence to prevent a reduction of duties. Indeed, from 
that time to this the pressure brought by protected producers upon 
Congress and congressmen has been the most serious obstacle in 
the way of tariff reform. For these reasons the war tariff level was 
maintained. Within a few years the popular mind became accus- 
tomed to high protection and more or less adjusted to it, and the 
lobbyists and representatives of protected interests found it relatively 
easy to secure what they wanted from Congress. 

Readjustments were, of course, made; but they were more nu- 
merous than important. In. 1870 under cover of certain reductions 
the duties were raised on a large number of articles. In 1872, 
because of surplus revenue, it was thought expedient to make a hori- 
zontal reduction of 10 per cent. Putting coffee and tea on the free 
list evidenced the determination of Congress to lower revenue rather 
than protective duties. In 1875 the tariff was restored to its former 
level. Because of a popular demand and another excess of revenue 
the schedules were again revised in 1883. The effort to satisfy the 
popular demand and at the same time to save the principje aroused 
considerable protest. In 1888 Cleveland came out strongly in favor 
of tariff reduction. 

Viewing their victory at this election as a vindication of their 
policy, the Republicans proceeded to adopt a new tariff, the Mc- 
Kinley Act, which surpassed in altitude all previous achievements. 
How well the demand for reducing revenue without sacrificing 
favors was met is evidenced by their action in removing the duty on 
sugar, averaging 2 cents a pound, and substituting for it a bounty of 
2 cents a pound on all sugar produced in this country. 

The popular protest was immediate. In the election of 1890 the 
Democrats captured the House, and won the presidency and the 
Senate two years later. The panic of 1893, which came while the 
McKinley Act was a law, and the troubles over the coinage of silver, 
for a time delayed revision. They also served to destroy party unity. 
A bill was passed by the House embodying substantial reductions. 
This, however, was radically amended by the Senate, the Republicans 
and a few bolting Democrats being responsible for the changes. The 
bill as passed embodied a series of duties lower than those of the 
McKinley bill, but substantially higher than those of the tariff of 
1883. President Cleveland was so displeasecl that he allowed the bill 
to become a law without his signature. 



3i6 CURRENT ECONOMIC PROBLEMS 

The act failed to relieve the depression following the panic which 
had been caused very largely by the silver legislation of the Re- 
publicans. Perhaps no tariff bill could have mended matters. Cer- 
tainly there was no threat to business in the Wilson-Gorman bill. 
Yet people began to blame the act for the failure of business to 
recover from the panic. The opportune reappearance of the silver 
question offered the Democrats a way of sidetracking the tariff. So, 
when Bryan in the national convention of 1896 made his "cross of 
gold" speech, he was hailed as the new leader of the party, and the 
free coinage of silver was declared to be the paramount issue. 

Nevertheless the tariff was not by any means lost from view.- 
The Republicans, victorious in the election of 1896, felt authorized to 
raise the tariff once more. In consequence they passed the Dingley 
law of 1897, which was a revision upward, restoring the general 
level of the McKinley Act. 

By 1900 the Republicans had formulated an argument which 
proved most effective. It was : "From 1894 to 1897 we had a 
Democratic tariff and hard times ; from 1897 to 1900 we have had a 
Republican tariff and prosperity." Some members of the party went 
so far as to attribute the panic of 1893 to the Wilson-Gorman bill 
which was not passed until more than a year later. It made no 
difference that the Democratic tariff had been a high protective 
measure. Nor did it make any difference that the hard times and 
prosperity were due to a very large number of other causes. Post 
hoc is propter hoc. The Democrats lacked courage to meet the 
issue, and attempted to use Imperialism as a shield. 

By 1904 sentiment favorable to revision had again begun to 
appear. The rise of the trusts, the revival of the old fear of monop- 
oly, and the knowledge that these combinations had in many cases 
been able to charge high prices because they were protected from 
foreign competition gave impetus to the movement for tariff reform. 
This was increased by the growing concern over the increase in the 
cost of living. By 1908 the sentiment was so strong that the 
Republicans promised that, if successful in the election, they would 
revise the tariff. The courage of the Democrats had returned and 
they demanded downward revision both in 1904 and in 1908. 

The result of the Republican victory was a special session of 
Congress in 1909, at which the Payne-Aldrich Act was passed. This 
act decreased many duties but raised many others. The general level 
of the Dingley bill of 1897 was maintained. It permitted no com- 
promising of the protective principle. As yet it is not evident that 



THE TA RIFF PROBLEM 3 1 7 

it contained changes tending either to curb monopolies or to reduce 
the cost of hving. 

159. Recent Tariff History 

The protest against the Payne-Aldrich bill was immediate and 
outspoken. At the biennial election in 1910 the Democrats won 
control of the House by a substantial majority. Looking ahead to 
the presidential election of 19 12, and sparring for political advantage, 
the majority party in the House passed several bills amending parts 
of the tariff act. These lowered duties, particularly on wool and 
products used on the farm. A personal revolt against President 
Taft within his party added enough votes to the Democratic minority 
to secure the passage of these bills through the Senate. But, as was 
to be expected, they were vetoed by the President. 

In 1912 the tariff again became one of the main issues in the 
election. The sentiment for revision was based upon a number of 
quite dififerent considerations. The opposition to monopoly and a 
belief that by legislation the government could furnish relief from 
the high cost of living were perhaps dominant. A belief that the 
tariff was conferring "special favors" upon privileged individuals, 
and hence was contrary to the spirit of government, was very wide- 
spread. In addition there was a substantial demand from quite a 
considerable contingency of manufacturers and commercial men 
favorable to revision. This demand was to a considerable extent 
due to the changed industrial position of the country. The era of 
prosperity through which we had passed had led to an enlargement 
of many plants to a point where they could supply much more than 
the domestic demand for their commodities. Since these businesses 
were in the stage of diminishing costs, they were anxious to find 
wider markets. Realizing that foreign trade is reciprocal, the manu- 
facturers involved were aiming to create a domestic demand for 
additional foreign products in order that foreigners might have 
claims with which to buy American goods. Consequently some 
manufacturers who, in 1897, when the fight was for the domestic 
market, favored high duties, in 1912 were found demanding lower 
duties. This sentiment was strengthened by a feeling that in some 
branches protection was no longer necessary. This demand from 
manufacturers is significant because of its evidence of a change in 
America's position in international trade. 

Although division in Republican ranks was instrumental in giving 
Wilson an unprecedented vote in the electoral college, and in securing 
for the Democrats control of the Senate and House, there is little 



3i8 CURRENT ECONOMIC PROBLEMS 

doubt that the country at large stood committed to a downward 
revision of the tariff. This was undertaken at a special session of 
Congress and culminated in the act of October 3, 1913. The making 
of no tariff bill in two generations was less influenced by the repre- 
sentatives of special interests sent to Washington. The bill was not 
extreme, but represented a genuine attempt to reduce duties. Its 
most significant changes were in putting wool on the free list imme- 
diately and sugar at the end of two and a half years. The former 
was a result of the popular agitation against the notorious Schedule 
K of the Payne-Aldrich Act. With free wool went the removal of 
the specific compensatory duties on woolens, as well as the specific 
duties on cottons and silks. Iron ore, pig iron, steel rails, and agri- 
cultural implements were all put on the free list. The act substituted 
many ad valorem for specific duties. But, since the reductions were 
in many cases upon articles which we habitually export, they were 
nominal -rather than real. The reduction of duties on agricultural 
products is a case in point. 

In general the tariff seems neither to have justified its friends nor 
its enemies. It has not reduced prices ; nor has it led to a closing 
of industries and general unemployment. Its effects, if effects it 
has had, have been so merged with those oT numerous other active, 
factors, particularly those of the European war, that they cannot 
be isolated. It was not expected that the act would result in any 
immediate extension of foreign markets. Custom and habit are too 
strong, and the spirit of business enterprise a little too slow for that. 
Whatever effect it may have had in sending American goods abroad 
has lost its identity in the general stream of causes affecting trade 
which have come in the train of the European struggle. The stalwart 
Republicans are attributing current bad industrial conditions to 
tariff tinkering. The financial papers, however, are not demanding 
upward revision. Their demand just now is for business to be let 
alone. At present there seems to be no strong sentiment in favor of 
upward revision. It is, perhaps, premature to express the hope that 
the tariff question is settled, and is a matter of history. The old 
sectional clash, intensified by an industrial struggle between the 
interests which demand foreign markets and the industries which 
still wish domestic protection, is too strong for that. The questions 
of the distribution of wealth between classes will also serve to keep 
it alive. Yet, since we are coming to grapple with the more vital 
problems of a full-grown industrial system, it seems safe to say it 
will never again have the importance which it has had in the past. 



THE TARIFF PROBLEM 319 

160. What a Tariff Bill Is Like^^ 

Section I. 
Schedule A. — Chemicals, Oils and Paints. 

I. Acids: Boracic acid, 94 cent per pond; citric acid, 5 cents 
per pound; formic acid, i^ cents per pound; gallic acid, 6 cents per 
pound; lactic acid, i^ cents per pound; oxalic acid, i^ cents per 
pound; pyrogallic acid, 12 cents per pound; salicylic acid, 2^ cents 
per pound ; tannic acid and tannin, 5 cents per pound ; tartaric acid, 
3^ cents per pound; all other acids and acid anhydrides not 
specially provided for in this section, 15 per centum ad valorem. 

5. Alkalies, alkaloids, and all chemical and medicinal co-m- 
pounds, preparations, mixtures and salts, and combinations thereof 
not specially provided for in this section, 15 per centum ad valorem. 

19. Chloroform, 2 cents per pound. 

48. Perfumery, including cologne and other toilet waters, 
articles of perfumery, whether in sachets or otherwise, and all 
preparations used as applications to the hair, mouth, teeth, or skin, 
such as cosmetics, dentfrices, including tooth soaps, paste, including 
theatrical grease paints, and pastes, pomades, powders and other 
toilet preparations, all the foregoing, if containing alcohol, 40 cents 
per pound and 60 per centum ad valorem ; if not containing alcohol. 
60 per centum ad valorem ; floral or flower water containing no 
alcohol, not specially provided for in this section, 20 per centum ad 
valorem. 

Schedule B. — Earth, Earthenware and Glassware. 

74. Plaster rock or gypsum, crude, ground or calcined, pearl 
hardening for paper makers' use ; white, non-staining Portland ce- 
ment, Keene's cemicnt or other cement of which gypsum is the com- 
ponent material of chief value, and all other cements not specially 
provided for in this section, 10 per centum ad valorem. 

91. Spectacles, eyeglasses and goggles, and frames for the 
same, or parts thereof, finished or unfinished, 35 per centum ad 
valorem'. 

99. Freestone, granite, sandstone, limestone, lava, and all other 
stone suitable for use as monumental or building stone, except 
marble, breccia, and onyx, not specially provided for in this section, 
hewn, dressed, or polished, or otherwise manufactured, 25 per 

^^ Adapted from The Tariff Act of October 3, 1913, 1-93. The repro- 
duction of the act in its entirety would require about one hundred pages of 
the size of this one. 



320 CURRENT ECONOMIC PROBLEMS 

centum ad valorem ; unmamif actured, or not dressed, hewn, or pol- 
ished, 3 cents per cubic foot. 

100. Grindstones, finished or unfinished, $1.50 per ton. 

Schedule C. — Metals and Manufactures of. 

102. — Chrome or chromium metal, ferrochrome or ferrochro- 
mium, ferromolybdenum, ferrophosphorus, ferrotitanium, ferro- 
tungsten, ferrovanadium, molybdenum, titanium, tantalum., tung- 
sten or wolfram metal, and ferrosilicon, and other alloys used in 
the manufacture of steel, not specially provided for in this section, 
15 per centum ad valorem. 

no. Steel bars, and tapered or beveled bars; mill shafting; 
pressed, sheared, or stamped shapes, not advanced in value or con- 
dition by any process or operation subsequent to the process of 
stamping ; hammer molds or swaged steel ; gun-barrel molds not in 
bars ; all descriptions and shapes of dry sand, loam, or iron molded 
steel castings, sheets, and plates ; all the foregoing, if made by the 
Bessemer, Siemens-Martin, open-hearth, or similar processes, not 
containing alloys, such as nickel, cobalt, vanadium, chromium, tungs- 
ten or wolfram, molybdenum, titanium, iridium, uranium, tantalum, 
boron, and similar alloys, 8 per centum ad valorum; steel ingots, 
cogged ingots, blooms and slabs, die blocks or blanks ; billets and 
bars and tapered or beveled bars; pressed, sheared, or stamped 
shapes not advanced in value or condition by any process or opera- 
tion subsequent to the process of stamping; hammer molds or 
swaged steel ; gun-barrel molds not in bars ; alloys used as substi- 
tutes for steel in the manufacture of tools ; all descriptions and 
shapes of dry sand, loam, or iron molded casting's, sheets, and plates ; 
rolled wire rods in coils or bars not smaller than twenty one-hun- 
dredths of one inch in diameter, and steel not specially provided for 
in this section, all the foregoing when made by the crucible, electric, 
or cementation process, either with or without alloys, and finished 
by rolling, hammering, or otherwise, and all steels by whatever 
process made, containing alloys such as nickel, cobalt, vanadium, 
chromium, tungsten, wolfram, molybdenum, titanium, iridium, ura- 
nium, tantalum, boron, and similar alloys, 15 per centum ad valorem. 

Schedule E. — Sugar, Molasses, and Manufactures of. 

177. Sugars, tank bottoms, sirups of cane juice, melada, con- 
centrated melada, concrete and concentrated molasses, testing by 
the polariscope not above seventy-five degrees, seventy-one one- 
hundredths of i per cent per pound, and for every additional de- 
gree shown by the polariscopic test, twenty-six one-thousandths of 



THE TARIFF PROBLEM 321 

I cent per pound additional, and fractions of a degree in propor- 
tion ; molasses testing not above forty degrees, 15 per centum ad 
valorem ; testing above forty degrees and not above fifty-six de- 
grees, 2^ cents per gallon; testing above fifty-six degrees, 4^2 
cents per gallon; sugar drainings and sugar sweepings shall be sub- 
ject to duty as molasses or sugar, as the case may be, according to 
polariscopic test : Provided, That the duties imposed in this para- 
graph shall be effective on and after the first day of March, nine- 
teen hundred and fourteen, until which date the rates of duty pro- 
vided by paragraph two hundred and sixteen of the tariff Act ap- 
proved August fifth, nineteen hundred and nine, shall remain in 
force : Provided, however. That so much of paragraph two hundred 
and sixteen of an Act to provide revenue, equalize duties, and en- 
courage the industries of the United States, and for other purposes, 
approved August fifth, nineteen hundred and nine, as relates to the 
color test denominated as Number Sixteen Dutch standard in color, 
shall be and is hereby repealed : Provided further. That on and 
after the first day of Ma}^, nineteen hundred and sixteen, the articles 
hereinbefore enumerated in this paragraph shall be admitted free of 
duty. 

Schedule G. — Agricultural Products and Provisions. 

188. Barley, 15 cents per bushel of forty-eight pounds. 

193. Rice, cleaned, i cent per pound ; uncleaned rice, or rice 
free of the outer hull and still having the inner cuticle on, ^ of i 
cent per pound. 

195. Butter and butter substitutes, 2I4 cents per pound. 

196. Cheese and substitutes therefor, 20 per centum ad valorem. 

205. Hay, $2 per ton. 

206. Honey, 10 cents per gallon. 

213. Straw, 50 cents per ton. 

214. Teazels, 15 per centum ad valorem. 

• Schedule N. — Sundries. 

341. Dice, dominoes, draughts, chessmen, chess balls, and bil- 
liard, pool, bagatelle balls, and poker chips, of ivory, bone, or other 
materials, 50 per centum ad valorem. 

347. Feathers and downs, on the skin or otherwise, crude or 
not dressed, colored, or otherwise advanced or manufactured in any 
manner, not specially provided for in this section, 20 per centum ad 
valorem ; when dressed, colored, or otherwise advanced or manu- 
factured in any manner, and not suitable for use as millinery orna- 
ments, including quilts of down and manufactures of down, 40 per 



322 CURRENT ECONOMIC PROBLEMS 

centum ad valorem ; artificial or ornamental feathers suitable for 
use as millinery ornaments, artificial and ornamental fruits, grain's 
leaves, flowers, and stems or parts thereof, of whatever material 
composed, not specially provided for in this section, 60 per centum 
ad valorem ; boas, boutonnieres, wreaths, and all articles not specially 
provided for in this section, composed wholly or in chief value of 
any of the feathers, flowers, leaves, or other material herein men- 
tioned, 60 per centum ad valorem: Provided, That the importation 
of aigrettes, egret plumes or so-called osprey plumes, and the feath- 
ers, quills, heads, wings, tails, skins, or parts of skins, of wild birds 
either raw or manufactured, and not for scientific or educational 
purposes, is hereby prohibited ; but this provision shall not apply to 
the feathers or plumes of ostriches, or to the feathers or plumes 
of domestic fowls of any kind. 

Free List. 

387. Acids : Acetic or pyroligneous, arsenic or arsenious, car- 
bolic, chromic, fluoric, hydrofluoric, hydrochloric or muriatic, nitric, 
phosphoric, phthalic, prussic, silicic, sulphuric or oil of vitriol, and 
valerianic. 

389. Acorns, raw, dried or undried, but unground. 

391, Agricultural implements: Plows, tooth and disk harrows, 
headers, harvesters, reapers, agricultural drills and planters, mowers, 
horserakes, cultivators, thrashing machines, cotton gins, machinery 
for use in the manufacture of sugar, wagons and carts, and all other 
agricultural implements of any kind and description, whether spe- 
cifically mentioned herein or not, whether in whole or in parts, in- 
cluding repair parts. 

407. Ashes, wood and lye of, and beet-root ashes. 

457. Coffee. 
. 512. Ice. 

513. India rubber, crude, and milk of, and scrap or refuse india 
rubber, fit only for remanufacture. 

586. Rags, not otherwise specially provided for in this section. 

652. Original paintings in oil, mineral, water, or other colors, 
pastels, original drawings and sketches in pen and ink or pencil and 
water colors, artists' proof etchings unbound, and engravings and 
woodcuts unbound, original sculptures or statuary, including not 
more than two replicas or reproductions of the same. 

SlJCTlON IV. 

I. That all goods, wares, articles, and merchandise manufac- 
tured wholly or in part in any foreign country by convict labor shall 
not be entitled to entry at any of the ports of the United States. 



THE TARIFF PROBLEM 323 

J. Su'bsection 7. That a discount of 5 per centum on all duties 
imposed by this Act shall be allowed on such goods, wares, and 
merchandise as shall be imported in vessels admitted to registration 
under the laws of the United States : Prozided, that nothing in this 
sub-section shall be so construed as to abrogate or in any manner 
impair or affect the provisions of any treaty concluded between the 
United States and any foreign nation. 



H. THE ARGUMENT FROM EXPERIENCE 
161. Protection and Prosperity-'^ 

BY ROBERT KLUS THOMPSON 

The policy of protection is challenged now to justify itself by its 
works at the bar of public opinion. We are not afraid of that test. 
We ask your attention to its broad results. 

It has raised the average of our national wealth from $514 a 
head (slaves included) in 1850, to $870 a head in 1880. 

It has increased the value of our manufactures five hundred per 
cent, and that of our foreign commerce in the same ratio, while the 
commerce of England increased but three hundred and fifty per cent. 

It has secured higher wages to our workmen and better prices 
to our farmers, without increasing to either the cost of staple manu- 
factures, as is shown by comparing the prices of textiles and hard- 
wares before and since i860. 

It has diversified our industries and raised our people out of that 
uniformity of occupation which is the mark of a low industrial devel- 
opment. 

It has stimulated inventions and improvements to the degree that 
some of the great staples of necessary use have been permanently 
cheapened to the whole world. 

It has drawn the different sections of the country into closer bus- 
iness relations, and has interlaced the great trunk lines of railroad 
to the West with others running Southward. 

It has brought the foreign artizan across the ocean, and has nat- 
uralized his craft on our shores, whereas Free Trade would have 
brought his work only. 

It has made us as regards the great staples independent of all 
other countries in case of war, while it has consolidated the national 

-^Adapted from Protection to Home Industry, 57-58 (1886). The 
student can easily find for himself a contemporary reading making prac- 
tically the same argument. 



324 CURRENT ECONOMIC PROBLEMS 

unity and increased the national strength to a degree that makes the 
rest of mankind anxious to be at peace with us. 

It has created a sentiment in favor of this policy so powerful 
that no political party ventures to oppose it openly, and such that 
the friends of Free Trade are hardly heard in our national cam- 
paigns. 

162. American Free Trade and American Prosperity-^ 

BY GEORGE BADEN-POWElvI. 

It is no long task to show that the prosperity of the United States 
exists in spite of, and not because of. Protection. So seldom do we 
remember that absolute Free Trade has been long and firmly estab- 
lished throughout the United States, and that it exerts an influence 
many, many times greater than that exerted by Protection. Free 
Trade reigns absolute and supreme within the frontiers of the United 
States. The full import of this fact is seen when we remember that 
the rapidly increasing population imports from abroad only one- 
quarter of the value of the goods that the British Isles import. And 
the vast and important home market of so very large and so very 
self-dependent a population is regulated entirely on principles of 
absolute Free Trade. 

The importance of this fact is all the more evident if we remem- 
ber that the United States is about as large as Europe, but with only 
one-seventh of the population. We have indeed a territory equalling 
Europe in extent and in variety of soil, climate, and product. But 
properly to picture the case we must sweep out of Europe all the 
English, Dutch, Danes, Swedes, Gennans, Russians, Austrians, Ital- 
ians, Swiss, Spaniards, Portugese, and Turks, and then distribute 
and settle over the whole area of Europe the population of France 
and Belgium only. Then if we add to such distribution of population 
perfect freedom of interchange of products all over this Europe, we 
will have a picture of the condition of the United States at the pres- 
ent day. It has been the dream of Cobden's disciples to extend 
Free Trade over Europe. America has long ago and definitely es- 
tablished Free Trade over an area equalling that of Europe. 

It is evident that the prosperity in the United States is due to 
this freedom of exchange and the comparative paucity of the peo- 
ple engaged in the highly profitable task of developing vast virgin 
resources. Of a truth the United States is a glaring instance of the 

^''Adapted from State Aid and State Interference, 22-2,7. Copyright by 
Chapman & Hall. 



THE TARIFF PROBLEM 325 

high economic value of Free Trade. Protection, influencing only 
by means of a comparatively insignificant import trade, is but a 
weakly drag on this prosperity. It occupies an altogether subordi- 
nate position as the direct factor for or against this prosperity. 

163. Free Trade and Prosperity'® 

HOW WORKMEN'S WAGES HAVE GONE UP 
SINCE 1880 



The increase in wages in the chief industries throughout the United 
Kingdom in the last 20 years, according to the Third Fiscal Blue Book 
(p. 212), has been as follows: 

Agriculture _ _ - _ 
Building Trades _ _ _ 
Coal Mining - - - - 
Engineering - - - - 
Textiles ----- 



10 


per cent 


17 


u 


52 


(( 


15 


(( 


22 


u 



FREE TRADE MEANS AN INCREASE IN YOUR WAGES 



FREE TRADE GIVES US THE FOREIGNER'S JOB 



One of the most absurd posters issued by the Tariff Reformers was 
one in which a British Workman was supposed to say: "The Foreigner 
has got my job." 

THAT POSTER IS A FRAUD 

It is the Foreigner who provides jobs for British Workmen! 



FOR EVERY £1 OF MANUFACTURED GOODS IMPORTED INTO 
THIS COUNTRY OVER £2 WORTH ARE SENT ABROAD 

"^Adapted from Wages, Food Prices, and Savings, a pamphlet used by 
the Liberal party in the English Parliamentary campaign in 1909-1910. 



326 CURRENT ECONOMIC PROBLEMS 

THE WORLD BANKS IN BRITAIN 



Under Free Trade Great Britain is the Banking Centre of the World 



The growth of British Banking may be measured by the value of 
the business transacted during the last 40 years. 

Here are the figures of the Bankers Clearing House Returns: 

1869 -----£ 3,626,000,000 

1879 - - . - - - 4,886,000,000 

1889 ----- 7,619,000,000 

1899 - - - - 9,150,000,000 

1909 ----- 13,525,000,000 



FREE TRADE MEANS LARGER INCOMES 



Great Britain's increasing prosperity under Free Trade is shown by 
the fact that the amount raised by the Income Tax has steadily increased. 
In 1882 a tax of id. in the £ produced 

£1,915,000 

In 1909 a tax of i^. in the £ produced 

£2,784,000 

More pounds were earned, and consequently more people were able 
to pay Income Tax in 1909 than in 1882. 

Those who pay Income Tax have larger Incomes than before. 



PROGRESS ON THE RAILWAY 
EXi^RESS SPEED TO PROSPERITY 



The growth of business u.nder Free Trade can be seen by the increase 
in the traffic on our railways as ^^hown by the following ofiicial figures: 

PASSENGER TRAI.FIC RECEIPTS 

J^88o - - - - - ^ - £27,200,000 

1890 - - - - _ _ 34,300,000 

19°° ----_.. /|.5,4oo,ooo 

1909 ------ 51,200,000 



THE TARIFF PROBLEM 327 

GOODS TRAFFIC RECEIPTS 

1880 ----__ £35,700,000 

1890 ---___ 42,200,000 

1900 ------ 53,500,000 

1909 ------ 59,500,000 

THE NUMBER OF RAILWAY SERVANTS EMPLOYED HAS INCREASED 
FROM 398,000 IN 1897 TO NEARLY 500,000 IN 1909 

THE PROFITS OF RAILWAYS HAVE INCREASED FROM £38,000,000 
IN 1895, TO £45,136,000 IN 1909 

I. THE IMPRACTICABLE NATURE OF PROTECTION 
164, A Humble Request of Congress^'' 

Resolved, That the mutuality of the interests of the wool pro- 
ducers and wool manufacturers of the United States is established 
by the closest of commercial bonds, that of demand and supply; 
it having been demonstrated that the American grower supplies 
more than 70 per cent of all the wool consumed by American mills, 
and, with equal encouragement, would soon supply all which is prop- 
erly adapted to production here; and further, it is confirmed by the 
experience of half a century that the periods of prosperity and 
depression in the twO' branches of the woolen industry have been 
identical in time and induced by the same general causes. 

Resolved, That as the two branches of agricultural and manu- 
facturing industry represented by the woolen interest involve largely 
the labor of the country, whose productiveness is the basis of 
national prosperity, sound policy requires such legislative action as 
shall place them on an equal footing, and give them equal encour- 
agement and protection in competing with the accumulated capital 
and low wages of other countries. 

Resolved, That the benefits of a truly national system, as applied 
to American industry, will be found in developing manufacturing 
and agricultural enterprise in all the States, thus furnishing markets 
at home for the products of both interests ; and 

Resolved, further. That it is the sense of this meeting that in 
the coming revision of the tariff the present duties both on wool 
and woolen goods be maintained without reduction. 

"^Resolutions of the National Wool Growers' Association and National 
Association of Wool Manufacturers, Hearings of the Ways and Means 
Committee of the House of Representatives, 60th Cong., 2d sess.. House 
Document 143, 533 1 (1909). 



328 CURRENT ECONOMIC PROBLEMS 

165. Woolens and Welfare^" 

BY N. T. FOLWELL 

Unlike the iron and steel industry, where machinery manufac- 
ture cheapens the cost of production, the manufacturer of worsted 
and woolen textiles has no advantage over his European competitor 
in quantity produced; man for man, loomi for loom, the production 
is the same. The climate of England, France and Germany is 
better adapted for spinning than ours, and they can spin finer yarn 
from the same grade oif wool than we can here, and consequently 
can run their spinning frames at a higher rate of speed, thus getting 
greater production. The oft-repeated story that an American 
workman can produce more than his brother abroad is false as far 
as the worsted and woolen trade is concerned. 

Our mills have been at a high cost of labor and materials and 
are partially filled with machinery that has paid a duty of from 30 
to 60 per cent. All the numerous articles which g-O' to equip a mill 
have cost from 30 to 50 per cent more than the amount required 
abroad. 

Our wages are double what are paid in England and three times 
the amount paid in France and Germany. 

There is no reason why the rates of duty should be lowered 
on worsted and woolen textiles, as conditions which prevail today 
are no different from those which prevailed at the time the Dingley 
bill became a law, with one exception, namely our wages have in- 
creased. 

We are importing from two to three million dollars per week, 
foreign cost, of dry goods, and this fact is conclusive proof that the 
tariff should be raised rather than lowered. 

166. A Recipe for Securing Duties^^ 

Elsmere, April 4, 1897. 

Dear Mr. Whitman : Now about the tariff. I cannot, after what 
has been said to me in reference to my confidential relations with 
the committee, keep you posted as I would like to do. . . Let 
me ask you a question. Should tops at a 24-cent line have the same 

^"Adapted from Hearings of the Ways and Means Committee, ibid., 
5341 (1909). 

^'^Adapted from Hearings of the Ways and Means Committee, ibid., 
5492-5493. 



THE TARIFF PROBLEM 329 

compensatory duty as yarns at a 30-cent line ? Should tops at a 24- 
cent line have a compensation duty of 27^ cents? . . I do not 
want you to intimate to any Senator that I have written you on 
this subject. I am kept at work from 10 A. M. until midnight and 
I have not sufficient clerical assistance as yet. I am the only person 
whom the committee allows at its meetings. 

Truly yours, 

S. N. D. North. 

Boston, June 2, 1897. 
My dear Mr. North : We all depend upon you to watch closely 
our interests, to see that nothing is overlooked or neglected by our 
friends on the committee. I have no doubt they will do all they 
can do, but with so many interests to look after, our special repre- 
sentative must see to it that our interests receive proper attention. 

Yours very truly, 

William Whitman. 

167. The Tariff a Local Issue^' 

Local interests, rather than fundamental considerations of prin- 
ciple, are the motives determining the attitude of the average con- 
gressman on the tariff. He is supremely concerned with securing 
for the favored interests of his own district all the protection pos- 
sible. His concern for interests in other districts is a mere means 
to this more important end. Alone he can accomplish nothing. He 
is perforce compelled to favor duties on articles produced elsewhere 
in order that he may secure what he desires. As a result a struggle 
over a tariff is by no means an attempt properly to apply fundamental 
and well-recognized principles to particular situations. It is rather 
an attempt to reconcile a conflict of a multitude of local and indus- 
trial interests. 

The following typical proposals will give a fair idea of the raw 
material out of which the tariff bill of 1909 was constructed. They 
will also throw some light upon the logic of the process by means of 
which the bill finally assumed form. A Massachusetts Republican 
demanded that hides be put on the free list. A Texas Democrat 
insisted that the duty on hides be raised. A South Carolina Demo- 
crat demanded a protective duty on rice. Free coal was pronounced 
by a Pennsylvania Republican to be a repudiation of the policy of 
protection. Several representatives, from different parts of the 

^^The evidence upon which this reading is based is all taken from The 
Congressional Record, 1909. 



330 CURRENT^ ECONOMIC PROBLEMS 

country, pleaded for higher duties on glass. Senators from the 
Rocky Mountain states dwelt upon the importance of protection of 
wool. The representatives from California demanded protection on 
lemons. A Democratic senator from Texas demanded a high duty 
on lumber. A Michigan Republican argued as ardently for a duty 
on sugar. A congressman from New York insisted that a duty on 
postcards would even things with Germany. Only one man was 
patriotic enough to want to apply the principle of protection without 
the slightest reservation. An Iowa congressman rose to the occasion 
by pleading that selfishness should be laid aside, that all should forget 
local and personal interests, that America should be the matter of 
first concern, and that the new tariff should be framed in such a way 
as adequately and equally to protect all industries. 

Senator Knute Nelson, of Minnesota, a protectionist and a 
Republican, summed up the situation in these words : "I am tired 
of being lectured to about these schedules, and about the orthodoxy 
of the Republican party. Let us recognize the fact that with a 
tariff bill it is just as it is with the River and Harbor bills. There 
is no use disguising it. You tickle me and I tickle you. You give 
us what we, on the Pacific coast, want for our lead ore and our 
citrus fruit, and we will tickle you people of New England and give 
you what you want on your cotton goods. When you boil down 
the patriotism of the speeches just made you come to the same basis 
as 'that of the River and Harbor bill. You vote for my creeks, 
you vote for my harbors, you vote for my rivers, and I will vote for 
yours, and it will be all right." 

1 68. Tariff for Politics Only^^ 

BY PETER EiNIvEY DUNNE 

"Well, sir, 'tis a gr-r-and worruk thim Sinitors and Congressmen 
are doin' in Wash'n'ton. Me heart bleeds for the poor fellows, 
steamin' away undher th' majestic tin dome iv th' capitol thryin' to 
rejooce th' tariff. The likes iv ye want to see th' tariff rejooced with 
a jack plane. But th' tariff has been a good frind to some iv thim 
boys an' it's a frind iv frinds iv some iv th' others an' they don't 
intend to be rough with it. A little gentle massage to rejooce th' 
most prom'nent prochooberances is all that is nicessry. Whiniver 
they rub too hard, Sinitor Aldhrich says, 'Go a little asier there, boys. 
He's very tender in some iv thim schedules. P'raps we'd better give 

^^Adapted from "The Tariff," in Mr. Dooley Says, 144-157. Copyright 
by Charles Scribner's Sons (1909). 



THE TARIFF PROBLEM 331 

him a little nourishment to build him up,' he says. An' th' last I 
heerd about it, ye won't notice anny reduction in its weight. No, sir, 
I shudden't be surprised if it was heartier than iver. 

"Me congressman sint me a copy iv th' tariff bill th' other day. 
I've been studyin' it f'r a week. 'Tis a good piece of summer lithra- 
choor. 'Tis full iv action an' romance. It beats th' Deadwood Dick 
series. It gives ye some idee iv th' gloryous govermint we're livin' 
undher, to see our fair Columbia puttin' her brave young arms out 
defindin' th' products iv our soil fr'm steel rails to porous plasthers, 
hooks an' eyes, artyficial horse hair and bone casings, which comes 
under th' head of clothin' an' I suppose is a polite name f'r 
pantaloons. 

"Iv coorse, low people like ye, Hinnissy, will kick because it's 
goin' to cost ye more to indulge ye'er taste in ennervating luxuries. 
D'ye know Sinitor Aldhrich ? Ye don't ? He knows ye. 'Tis as if 
he said : 'This here vulgar plutocrat, Hinnissy, is turnin' th' heads 
iv our young men with his garish display. Befure this, counthries 
have perished because iv th' ostintation iv th' arrystocracy. We must 
presarve th' ideels iv American simplicity. We'll put a tax iv sixty 
per cent on ready made clothin' costin' less thin ten dollars a suit. 
That'll keep Hinnissy from squanderin' money wrung fr'm Jawn D. 
in th' roo dilly Pay. We'll make a specyal assault on woolen socks 
an' cowhide shoes. We'll make an example iv this here pampered 
babe iv fortune,' says he. 

"An' there it is. Ye haven't got a thing on ye'r back excipt ye'er 
skin — an' that may be there ; I haven't got as far as th' hide schedule 
yet. It's ye'er own fault. If ye will persist in wearin' those gee- 
gaws ye'll have to pay f'r thim. If ye will go on decoratin' ye'er 
house with shingles an' paint an' puttin paper on th' walls, ye've got 
to settle. That's all. 

"Ye'd think th' way such as ye talk that ivrything is taxed. It 
ain't so. 'Tis an insult to th' pathritism iv Congress to say so. Th' 
Republican party, with a good deal iv assistance fr'm th' pathriotic 
Dimmycrats, has been thrue to its promises. Took at th' free list, if 
ye don't believe it. Practically ivrything nicissry to existence comes 
in free. What, for example, says ye. I'll look. Here it is. Curling 
stones. Ye'll be able to buy all ye'll need this summer for practically 
nawthin. What else ? Well, teeth. Here it is in th' bill : 'Teeth 
free iv jooty.' Undher th' Dingley Bill they were heavily taxed. 
Onless ye cud prove that they had cost ye less thin a hundred dollars, 
or that ye had worn thim f'r two years in Europe, or that ye were 
bringin' thim in f'r scientific purposes or to give a museem, there 
was an enormous jooty on teeth. Now ye don't have to hand a five 



332 CURRENT ECONOMIC PROBLEMS 

to th' inspictor an' whisper : 'I've got a few bicuspids that I picked 
up abroad. Be a good fellow and let me through.' No sir, teeth are 
free. 

"What other nicissities, says ye? Well, there's sea moss, news- 
papers, nuts, an' nux vomica. They've removed th' jooty on Pulu. 
I didn't think they'd go that far. Ye know what Pulu is, iv coorse, 
an' I'm sure ye'll be glad to know this refreshin' bev'rage or soap is 
on th' free list. An' cannary bur-rd seed is fhree. Lookin' down th' 
list I see that divvy-divvy is free also. But there are other items, 
mind ye. Here's some of them : Apatite, hog bristles, wurruks iv 
art more thinn twinty years old, kelp, marshmallows, life boats, silk 
worm eggs, stilts, skeletons, turtles, an' leeches. Th' new tariff bill 
puts these family commodyties within th' reach iv all. An' yes, 
opium is on th' free list. Th' tariff bill woulden't be complete without 
that there item. But it ought to read : 'Opyum f 'r smokin' while 
readin' th' tariff bill.' Ye can take this sterlin' piece of lithrachoor to 
a bunk with ye an' light a ball iv hop. Bef ure ye smoke up p'raps ye 
can't see where th' tariff has been rejooced. But afther ye've had a 
long dhraw it all becomes clear to ye. Ye'er worries about th' 
children's shoes disappear an' ye see ye'ersilf floatin' over a purple 
sea, in ye're private yacht, lulled by th' London Times, surrounded 
be wurruks iv art more thin twinty years old, atin' marshmallows 
an' canary bur-rd seed, while the turtles an' leeches frisk on th' 
binnacle. 

"Well, sir, if nobody else has read th' debates on th' tariff bill, I 
have. Th' walls iv Congress has resounded with th' loftiest sinti- 
ments. Hinnery Cabin Lodge in accents that wud melt the heart iv 
th' coldest manyfacthrer iv button shoes has pleaded f 'r freedom f'r 
th' skins iv cows. I'm sorry this appeal wasn't succissful. Th' hide 
iv th' pauperized kine iv Europe will have to cough up at th' custom' 
house before they can be convarted into brogans.^* This pathriotic 
result was secured be th' gallant Sinitor fr'm Texas. He's an ardint 
free thrader, mind ye. He's almost a slave to th' principles iv th' 
Dimmycratic party. But he's no blamed bigot. He can have prin- 
ciples an' lave thim alone. An' I want to tell ye, me f rind, that whin 
it comes to distributin' th' honors f'r this reform iv th' tariff, don't 
fail to throw a few flowers at th' riprisentatives iv our small but 
gallant party. It was a fine thing to see thim standin' be th' battle 
cry iv our grand old organyzation. 

"Says th' Sinitor fr'm Louisyanny : Xouisyanny, th' proudest 
jool in th' dyadim iv our fair land, remains thrue to th' honored 

**It is prosaic to spoil Mr. Dooley's figure by stating that he is wrong 
on this point. Hides were admitted free of duty by the Payne-Aldrich bill. 



THE TARIFF PROBLEM 333 

teachin's iv our leaders. Th' protective tariff is an abomynation. 
It is crushin' out th' lives iv our people. Wan iv th' worst parts is 
th' tariff on lathes. Fellow sinitors, as long as one dhrop iv pathriotic 
blood surges through me heart, I will raise me voice again a tariff on 
lathes, onless,' he says, 'this dhread implyment iv oppressyon is 
akelly used,' he says, 'to protict th' bland an' beautiful molasses if th' 
State iv me birth,' he says. 

" 'I am heartily in sympathy with th' sinitor fr'm Louisyanny,' 
says th' Sinitor fr'm Virginya. 'I loathe th' tariff. Fr'm me arliest 
days I was brought up to look on it with pizenous hathred. At many 
a convintion ye cud hear me whoopin' agin' it. But if there is such a 
lot iv this monsthrous iniquity passin' around, don't Virginya get 
none? Gintlemen, I do not ask, I demand rights f'r me common- 
wealth. I will talk here ontil July fourth, nineteen hundred an' 
eighty-two, agin' th' proposed hellish tax on feather beds onless 
somethin' is done f'r th' tamarack bark iv old Virginya.' 

"A sinitor : 'What's it used f'r ?' 

"Th' sinitor fr'm Virginya : 'I do not quite know. It is ayether 
a cure f'r th' hives or enthers largely into th' mannyf acture iv carpet 
slippers. But there's a frind of mine who makes it an' he needs the 
money.' 

" 'Th' argymints iv th' Sinitor fr'm Virginya are onanswerable,' 
says Sinitor Aldhrich. 'Wud it be agreeable to me Dimmycratic 
colleague to put both feather beds an' his what-ye-call-it in th' same 
item ?' 

" 'In such circumstances,' says th' Sinitor fr'm Virginya, 'I would 
be foorced to waive me almost insane prejudice again' th' hellish 
docthrines iv th' distinguished Sinitor fr'm Rhode Island,' says he. 

"An' so it goes, Hinnessy. Nivir a sordid wurrud, mind ye, but 
ivrything done on th' fine old principle iv give an' take." 

"Well," says Mr. Hinnessy, "what difference does it make? Th' 
foreigner pays th' tax, anyhow." 

"He does," said Mr. Dooley, "if he ain't turned back at Ellis 
Island." 

169. Tricks of Tariff Making^^ 

A superficial comparison of two tariff bills gives very little clue 
to the differences between them. An accurate count of the number 
of increases and decreases in the later, as compared with the earlier 
bill, throws no light upon the larger question of whether the revision 

^^The evidence presented in this reading is all taken from "The Tariff 
of 1909," by H. Parker WilHs, in the Journal of Political Economy, XVII, 
597-611. 



334 CURRENT ECONOMIC PROBLEMS 

was an upward or a downward revision. This method is important 
only because of its suggestion of a method for proving to superficial 
observers that there has been an upward or a downward revision. 
Real changes and their effects can be determined only by examining 
rates on particular commodities in view of a knowledge of all the 
conditions surrounding the production of these commodities. This 
can be well illustrated by reference to the tariff of 1909. 

The statement has been repeatedly made that this tariff substan- 
tially reduced the level of duties. The conclusion is established by 
the arithmetical process of counting advances and reductions. It 
fails, however, to take into consideration the fact that most of the 
duties reduced were upon commodities which are produced in this 
country for export. In such cases tariff duties are purely nominal. 
They can in the very nature of things furnish no protection, because 
there is nothing to protect against. On the contrary the increases 
were upon goods which needed, or at any rate could profit by, ad- 
vances. To take a few illustrations : In Schedule A the duties on 
most acids were cut, as well as upon ammonia, borax, and ether. 
On drugs, however, which were in position to profit, substantial 
advances were made. In Schedule B the rates were reduced on 
firebrick, marble, onyx, granite, and other non-portable articles. On 
pumice stone and certain grades of glass, duties, however, were 
raised. In Schedule C the reductions in nominal duties were very 
large, that on iron ore dropping from 40 to 15 cents. Yet upon the 
more expensive and finished metal products there were material 
advances. The best examples in the bill, however, are contained in 
Schedule G, dealing with agricultural products, of which we export 
very large surpluses. Neglecting the obvious facts of the grain 
trade, Congress tried to give the impression of great care for the 
farmer. Thus on broom corn, which had been free, a duty of $3 a 
ton was imposed ; the rate on buckwheat flour was raised from 20 to 
25 per cent; on oats from 15 to 20 cents a bushel. Hops were 
advanced from 12 to 15 cents a pound. For some obscure reason 
the duty on cabbages was dropped from 3 to 2 cents. Nursery stock 
and fruits received a general raise. Congress, of course, did not 
overlook the opportunity of dealing the usual "blow at the beef 
trust" by reducing the duty which it did not need. 

But many devices much more subtle than these found their way 
into the bill. Many changes were made in the unit of measurement 
for customs purposes. Electric lighting carbons, for instance, which 
had been 90 cents per hundred, were now made 65 cents per hundred 
feet on certain grades and 35 cents on other grades, the only kind 
imported in practice being dutiable at the higher rate. A provision 



THE TARIFF PROBLEM 335 

in the cotton schedule that in counting threads, upon the number of 
which the rate of duty depended, "all the warp and filling threads" 
should be included, operated practically to double the duties upon 
some classes of goods, in so much as, under the former method of 
counting, "double yarns," in which the thread is twisted together out 
of two or more yarns, had been counted as a single thread. The 
enormous concession made to the public by the reduction of the tariff 
on sugar by one-twentieth of a cent a pound, a reduction which could 
have no influence on price, was the mask for changing the method 
of weighing sugar, which in itself amounted to a substantial increase 
in duty. 

These examples by no means cover the act. In fact it is doubtful 
whether all the tricks in the bill will ever be discovered. However, 
they are typical of the kinds of tricks that are incorporated in the 
American tariff bill. 

J. THE SCIENTIFIC REVISION OF THE TARIFF 

170. Producers' Costs and Tariff Duties^® 

BY wiiviviAM c. re;dfie;ivD 

In the Republican platform, of 1908 appeared the following 
words : "In all tariff legislation the true principle of protection is 
best maintained by the imposition of such duties as will equal the 
difference between the cost of production at home and abroad, to- 
gether with a reasonable profit to American industries." 

It is a great pity that those words were printed only in the 
English language. It is a pity that they were not translated into 
Japanese, that they might adorn the cabs of the 720 American loco- 
motives in Japan ; and into Chinese, that those in Manchuria who 
wear American cottons might know how self-sacrificing the makers 
were in selling them to themi. It is a pity that they were not trans- 
lated into Hindu,' that the stokers of the Calcutta electric-light works 
might know how generous was the American firm that sold them 
their apparatus. 

But since the difference in the cost of production is said tO' be 
such that we need protection against the manufacturers abroad, let 
us look more closely at those words. Speaking from a manufac- 
turer's standpoint, I venture to think it can be shown that this 
statement of the Republican platform has these definite character- 
istics, i) It involves certain contradictions, well known to manu- 
facturers, which destroy its force. 2) It assumes the existence 

^"Adapted from The New Industrial Day, 81-102, 120, 122, 127, 130-131. 
Copyright by the Century Co. (191 1). 



336 CURRENT ECONOMIC PROBLEMS 

of facts which do not exist. 3) It may involve such discrimi- 
nation against some American manufacturers and in favor of some 
foreign manufacturers as is certainly unjust. 4) It ignores the 
nature of cost and the nature of competition, and, taken on its face, 
calls for the removal of the duties on many American manufac- 
tures. 5) It has worked grave injustice to our poor people and 
disaster to many American manufacturers. 

These things I believe at the end of twenty-five years' manu- 
facturing experience. I have found it possible, and we all know 
hundreds of American manufacturers have found it possible, to 
compete in the markets of the world. How does it happen that in 
a quotation recently made for machinery to a mine in Japan the 
American price was $215 less than the English price. Last year I 
was in the city of Tokyo, and a friend who was with me took a 
large contract from the Japanese Imperial State Railways, in open 
competition with Germany and England for several million dollars' 
worth of locomotives. That gentleman, at the locomotive shops of 
the Imperial Railways, was told, "We can make locomotives much 
cheaper than you can in America." "Can you?" inquired my friend. 
"If so, let us get at the facts. What makes you think your loco- 
motives cost less than ours?" "Why," the Japanese replied, "be- 
cause we pay only one-fifth the wages to our men that you pay to 
yours." So they got the cost books, and discovered that the labor 
cost for locomotives on the same specifications was three and one- 
half times greater in the Japanese than in the American shop. That 
is a perfectly normal fact. 

Another illustration may be interesting. My agent in the city 
of Calcutta one day called my attention to the shoes he was wear- 
ing. He said, "I paid $3.85 for those shoes." "Why," I said, "that 
is an American shoe." "Yes," he said, "I bought it here. It is the 
regular American $5 shoe." 

I treasure as a souvenir a small, ordinary pencil. It has upon it 
the name of the American Lead Pencil Co. I bought it out of 
stock in the small town of Bandoeng, in central Java. I have in 
my home some men's toilet articles — shaving soap, etc., made in 
New Jersey. I bought them in Hongkong. 

Yet we are told that though foreign manufacturers are handi- 
capped by distance, time, and freight, we can not compete with 
them at home because we pay high wages. To end these illustra- 
tions, let me give a list taken at random from one export journal 
of American goods offered abroad for sale in open competition 
with Germany and Great Britain: "Ironmongery, fine tools, bicycles, 
sporting goods, lamps, razors, firearms, carriage makers' supplies, 



THE TARIFF PROBLEM 337 

sanitary goods, lighting systems, dry goods, men's furnishings, 
boots and shoes, corsets, hats and caps, textiles, clothing, women's 
furnishings, office furniture, ofQce devices, stationery, typewriters, 
filing cabinets, printers' supplies, paper, machine tools, boilers, 
lubricants, electrical material, valves, v/ood-working machinery, 
belting, shafting, pulleys, packing, furniture, kitchenware, and agri- 
cultural implements." There are manufacturing houses in America 
that sell almost no goods in the United States. They pay as high 
wages as anyone. 

It is often assumed that American manufacturers cannot com- 
pete in the world's market on even terms without protection, and 
can not even hold their own at home. The only way suggested of 
meeting competition is by reducing wages, the citidest, the coarsest, 
and the most brutal of all methods. 

To get at the heart of the question, let us look at the cost of 
production from the manufacturer's stanpoint. There are four 
groups that enter into every factor}^ cost: i) the cost of labor; 
2) the cost of material; 3) overhead charges; and 4) selling cost. 
The aggregate of these four fixes the point per unit where profits 
begin. Let us discuss them separately : 

First, labor cost. In a modern industry this is often not the 
largest element in cost per unit of product. It is a matter of testi- 
mony that in an American locomotive the percentage of direct labor 
cost is eighteen and that of material and overhead charges eighty- 
two. The important factor in labor cost is not the rate of wage, 
but the rate of output. It is not what you pay but what you get 
from what you pay that counts. 

Once in Paris I employed a lot of French carpenters and paid 
them each $1.90 a day, and at the end of four days I was well-nigh 
crazy. Accidentally T found a man who looked like an American 
carpenter. "Are you a Yankee?'' I said. "T want to employ you 
at once." He said, "Boss, I charge $4.50 a day." I said, "Come 
right along." Two days later I discharged four Frenchmen, for my 
one American carpenter did more than four Frenchmen. There are 
sound reasons for this. A French workman goes to work having 
eaten almost nothing. For breakfast he has a bit of bread and 
coffee. At eleven o'clock he eats a little bread and drinks a little 
sour wine. At three he does the same. At night he has what he 
calls a dinner. Such a man cannot work at any labor requiring 
steady physical exertion in competition with a man who eats three 
square meals a day. 

Cost is everywhere and always variable — at every time and in 
every place. Output varies with the character of the workman, the 



338 CURRENT ECONOMIC PROBLEMS 

equipment, the arrangement, with the nature of the superintendence, 
with the discipline. It is absurd to^ assume that work done by a 
man paid $4 daily costs more per unit than work done by a man 
paid $2. It may be more or less costly. Therefore, because cer- 
tain goods are produced at a certain labor cost per unit when the 
wage rate is $3 per day in a certain place, it can never be argued that 
the same wage rate on similar goods results in like labor cost per 
unit in another place. It may vary ten to fifty per cent. To discuss the 
wage-rate as the controlling factor in labor cost per unit is both 
inadequate and misleading. To say that a man gets $3 per day 
means nothing at all as to the cost of his product. It may be either 
high or low. 

Apart from the wage rate, labor cost per unit is very largely 
under the control of the manufacturer and may be radically altered 
without changing the wage rate at all. I know a factory in which 
the product was doubled in two years without adding a man or 
without adding a machine. This is how it came about. The men 
had been paid on day work. The head of the concern changed to 
a piece work plan, guaranteeing the day wage as a minimum, and 
further guaranteeing that the piece work rate should not be cut. 
The first result was largely to increase the product. Then three 
other things happened. The manufacturer went to a man and said, 
"Pat, you are earning pretty good wages. The more you earn the 
better for us both. But there is one thing you cannot afford, and 
that is to have your machine shut down for repairs. It hurts me 
and hurts you every hour that machine is idle." The result was 
that the fifteen minutes which the employees were induced to- spend 
in overhauling the machine each day saved many thousands a year 
for the factoiry. In the next place more scientific firing saved one- 
eighth of the operating time of that part of the plant, besides an 
imimense saving in fuel. In the third place several thousands a 
year was saved on preventing the output of bad goods. In these 
ways the output of the factory was doubled in two years and 
the same thing is possible everywhere. 

Labor cost per unit varies with time and place, and in the same 
shop is constantly changing. It is affected by sanitary and climatic 
conditions. It is enormously modified by the progress of inven- 
tions. The labor cost in July may be entirely altered in December. 
It varies with the arrangement of the machinery within the shop, 
is affected by the space available. It varies with the sufficiency 
and regularity of the supply of material and its suitability to the 
work. It is affected by the lighting and the power equipment of a 



THE TARIFF PROBLEM 339 

shop and will change with a change in superintendents. It is af- 
fected by the methods of paying. And I write from an experience 
in figuring labor costs to hundredths of a cent per unit. Labor cost 
is, therefore, a variable element. It can not be measured by any 
fixed standard. To offer a fixed rate of duty to cover the differ- 
ences in labor cost is to state an absurdity, for the one is variable 
and the other is fixed. In like manner it can be shown that costs of 
material, overhead charges, and selling charges are variable. 

In fact, given the scientific spirit in management, constant and 
careful study of operations and details of costs, modern buildings 
and equipment, proper arrangement of plant and proper material, 
ample power, space and light, a high wage rate means inevitably 
a low labor cost per unit of product and a minimum' of labor cost. 
A steadily decreasing labor cost per unit is not inconsistent with, but 
is normal to, a coincident advance in the rate of pay when accom- 
panied by careful study of methods and equipment. Conversely 
low-priced labor nearly always is costly per unit produced, and 
usually is inconsistent with good tools, equipment and large and 
fine product. From, the above it is affirmed, without fear of suc- 
cessful contradiction, that American production today is often 
as cheap or cheaper in the labor cost per unit than foreign, and, 
so far from needing protection, it needs to be set free, that we may 
conquer the world. 

I believe that protection is an injury to American manufac- 
turers by limiting their scope and by narrowing their horizon. I 
believe it costs them enormously in the loss in foreign business, and 
that is one reason why manufacturers in this country are so- rapidly 
ceasing to be protectionists. Another reason for their change of 
faith is that their plants have become so large that only in rare years 
has the demand in this country become enough to take their total 
product, and they have had to sell abroad. And so long as they must 
pay the high price for materials they find it somewhat difficult to sell 
abroad, although they succeed at it. An overstocked domestic 
market is often no theory but a real condition. Take away the 
shackles that bind the manufacturer and he will be free to sell in 
the world's markets, without touching his pay roll. 

Protection, however, causes a manufacturer almost inevitably 
to depend on the Government for help, instead of carefully and 
minutely studying the details of his own business. Protection, more- 
over, has enabled many American manufacturers to prosper by sell- 
ing to their fellow countrymen at prices so high that they have 
not thought it necessary to study their own businesses closely, be- 
cause they depend upon Governm^ent backing. 



340 CURRENT ECONOMIC PROBLEMS 

171. Investigation and Tariff Legislation^^ 

BY hi;nry c. i;mi;ry 

It is easy to point out the difficulties in determining the cost of 
production, the great variations in the cost of production at differ- 
ent times- and in different places in the same country, and the 
absurdity of applying this principle with absolutely rigid logic. But 
any principle of actual commercial legislation roust be somewhat 
rough and ready and is never intended by practical men tO' be carried 
to absolutely logical conclusions. It can, of course, be pointed out 
that in strict logic such a principle as that just mentioned would 
require the enactment of a different tariff on goods imported from 
different countries, according to the variations in cost of produc- 
tion in those countries. 

This, however, can be easily met by the application O'f a little 
common sense and the recognition that the real question is to adjust 
rates in such a way as to meet the competition of the chief com- 
peting country. If there are several countries whose products com- 
pete actively, the true protectionists would demand that rates should 
be adjusted to meet the comipetition of that country in which the 
cost of production was the lowest. 

It can, of course, be pointed out, furthermore, that the logical 
application of this principle would require enormous duties on 
articles, like coffee and rubber, which are not produced in this 
country at all. But here, again, it is not a question of strict logic, 
but of practical common sense. Not even the most extreme pro- 
tectionist ever dreamed of applying the principle to articles of this 
kind. 

I am convinced, however, that it is possible in the case of most 
staple articles of manufacture, to detemiine the ratio of the costs 
between two different countries with sufficient accuracy for prac- 
tical legislation. There is, of course, no single cost of production 
of any article for a given country, but there is a fairly definite dif- 
ference in the money costs of a given specified article between two 
different countries ; and this ratio can in many cases be sufficiently 
well determined to make such information of great value. 

As to the question of getting this information, the problem has 
proved easier, so far as domestic manufactures are concerned, than 
was expected, and has not proved insuperable in the case of foreign 
manufactures. Although in most cases it is impossible tO' get for- 
eign information as complete and detailed as that which can be se- 

^^Adapted from an article in the American Economic Review, II, Supple- 
ment 20-25. Copyright by the American Economic Association (191 1). 



THE TARIFF PROBLEM 341 

cured for the industry in this country, we are convinced that enough 
information can he secured for an adequate basis of judgment. In 
any case, even if foreign costs could not be secured, the determina- 
tion of the cost of production at home would still be an important 
part of a tariff inquiry. The real question is not so much what 
is the actual mill cost in a competing country, but at what prices 
and under what conditions could goods be laid down in the Amer- 
ican market to compete with the home product in the absence of 
any customs duty. These facts can be determined with sufficient 
accuracy for legislative purposes. 

Of course, many of you will say that all the foregoing implies 
the maintenance of the protective principle, and that since you 
do not believe in the protective principle you can see no utility 
in investigations of this kind. There are two answers to this. In 
the first place, it seems to mie absurd tO' protest against a better 
method of accomplishing a given result, simply because you do 
not believe in the result itself. If the free trader can get his policy 
adopted and put into actual practice by the people, well and good. 
But if, as a matter of actual politics, the people prefer a protective 
tariff, even the free trader ought to welcome an effort to^ have such 
a tariff, of which he disapproves in principle, levied as honestly and 
fairly as possible. To' do otherwise, would be to put one's self in the 
position of a man whO' could oppose regulations protecting the safety 
of passengers in ocean travel, or the welfare of seamen engaged 
in such occupation, on the ground that he did not believe in people 
going abroad, and therefore did not believe in making travel as 
safe as possible. 

The second answer is that a tariff with no protection features 
has never been seriously considered by any political party in this 
country. One great party does, on the whole, believe in a revenue 
tariff and is working toward that end, meaning by this only that 
duties shall be levied primarily ior revenue purposes rather than 
for protective purposes. However, this program involves the 
placing of import duties on a large variety of articles which are 
produced at home and which consequently bear incidental pro- 
tection. 

Therefore, a study of relative industrial conditions becomes as 
important for the person who believes in a revenue tariff as it does 
for the protectionist. In the first place, it may be assumed that a 
Congress wishing to adjust duties in this way, while aiming solely 
to secure revenue, would prefer to get the needed revenue with 
the least disturbance possible to business. Furthermore, they wish 



342 CURRENT ECONOMIC PROBLEMS 

to raise the largest amount of revenue with the least burden pos- 
sible on the consumer. This, again, can be determined only after 
a very careful study of relative industrial conditions. 

Even more important, how^ever, from the point of viev^ of the 
revenue principle, is the fact that, where it is intended to raise 
revenue by imposing duties on a large number of articles rather than 
on a few non-competing articles, it is impossible to make any ac- 
curate estimate of what the revenues will be, until a study has been 
made of relative prices and costs as a basis for determining how far 
imports would be increased or decreased by changes in duties. 

172. The Impossibility of Ascertaining Costs^® 

BY H. PARKE;r WIIvUS 

The case against the cost-of -production theory as a regulator 
of tariff duties may be summed up in a series of propositions some- 
what as follows : 

1. In practice the ascertainment of costs is impossible. No 
board of commission has the power to demand cost statements 
from manufacturers or producers; and if it had, it could not se- 
cure truthful statements. Moreover, there is no way of obtaining 
statements of any kind from foreigners. 

2. Even if all manufacturers both here and abroad were willing 
to throw open their books in an absolutely honest and impartial 
way to an all-powerful commission, it would be of little service. 
This is because cost accounting is not generally practiced by pro- 
ducers and because, where it is practiced, there is no general agree- 
ment as to the treatment of different elements of cost. 

3. If there were a perfect system of cost accounting installed 
upon a uniformi basis in every plant manufacturing a given article 
throughout the world, knowledge of comparative costs would still 
be of little service, since costs in every country would have to be 
known before any conclusions could be arrived at as to what tariff 
rate was needed to protect a given country against the competition 
of others. 

4. If all these facts were known for every country, the diffi- 
culty would be about as great as it was previously if the data were 
to be used for the establishment of tariff rates. This is because 
costs of production vary as widely within a given country as they 
do between different countries. Unless it were known whether a 
duty were to be imposed for the purpose of equalizing costs as 

^^Adapted from an article in the Journal of Political Economy, XIX, 



the\tariff problem 343 

between the best, the poorest, or the average establishments in the 
several countries, the information about costs would be useless as a 
basis of tariff duties. 

5. Even with knowledge on all of the points already enumer- 
ated, and with a clear-cut intention on the point indicated above, 
the cost analysis would still be inadequate because of the fact that 
many commodities are produced in groups, or as by-products of 
one another, so that tO' utilize the general cost analysis as a basis 
for tariff rates, it would be necessary to know the manufac- 
turer's intention with reference to the fixing of prices. It would 
further be necessary to know that the manufacturer had no dis- 
po'sitlon to establish "export prices" at rates lower than those that 
would be dictated by his costs of production. 

6. If all of the foregoing factors were known, including posi- 
tive data regarding the intention of the manufacturer in regard 
to the establishment of prices, there would still remain the ques- 
tion whether this information about costs, which is necessarily stated 
in terms of money, would have any real significance of a permanent 
economic character. Money costs do not correspond in all cases 
to real costs as measured by sacrifice of labor and capital. It may be 
true that a given country can produce much more cheaply than 
another, yet it does not follow that it will so produce, since its cost 
advantage in some other line may be so much greater as to dictate 
its devoting its attention almost exclusively to that line. 

For all these reasons, the conclusion must be reached that cost 
of production is both practically impossible and theoretically un- 
sound as a basis for the establishment of tariff duties. 



VII 
THE PROBLEM OF RAILWAY REGULATION 

In a machine system continental in extent and embracing a varied host of 
correlated industrial activities the railroad occupies a position of strategic 
importance. Through it the vast and intricate gear of "the industrial machine" 
is made to "engage." Its rates, by influencing costs and prices, perform im- 
portant services in the organization and direction of industry. It is inevitable, 
therefore, that we should have "a railroad problem" which three considerations 
impel the public to keep alive. First, the railroad is an industrial unit of 
large size ; and in a country steeped in the conventions of competition, the 
giant is always under suspicion. Second, the business tends to be monopo- 
listic; and to monopoly the public imputes not only horns and forked tail, 
but a capacious maw as well. Third, it is an instrument possessed of great 
powers of industrial control; for through its "manipulation" of rates it can 
cause industry to flourish or fade; it can give to industrial development a 
"natural" or an untoward direction. These considerations have caused the 
problem to wear a constant freshness which comes from its varied and never- 
ending sequel. 

When "railroads were new" our people were thoroughly imbued with 
individualism. Firmly convinced were they that one should have what he 
earned, and that he earned "what he got." They were satisfied that in com- 
petition the public possessed an adequate safeguard. They did not hesitate to 
pronounce "regulation" "meddlesome interference" and to characterize the 
almost unthinkable proposal of government ownership as "socialistic." But 
they had no adequate conception of the nature of the railroad industry. They 
did not see that railway economy requires monopoly ; that the proper per- 
formance of its services requires the business to be endowed with public 
powers; that costs of particular services cannot be isolated to do duty as 
bases for particular rates ; and that "normally the industry is in a stage of 
increasing returns." 

These economic characteristics of the industry, quite in opposition to 
popular theory, have determined our policy in dealing with it. We have 
found that attempts to fix rates by competition have resulted in alternate pe- 
riods of high and low charges, in fluctuating dividends and prices of secur- 
ities, in speculation and "railroad wrecking," in unpredictable items of future 
cost, introducing elements of grave risk into every business enterprise. We 
have been confronted with abundant testimony of discriminations in favor .of 
large shippers and particular localities ; and have concluded that "unreasonable 
rates" were interfering with the "natural" course of development and were 
favoring monopoly. And more than once we have suspected that, because of 
its peculiar position, the railroad was inclined to charge too much. These 
observations we have translated into problems which, through the state, we 
have tried to solve. 

A protracted and unpleasant experience has convinced us, slowly to be 
sure, that the problem cannot be solved in terms of competition. We have 
never been quite willing formally to renounce so efficacious an instrument of 
salvation ; but, unconventionally at any rate, we have little by little quit trying 
to make the railroads compete. 

Primarily, perhaps, because discrimination appeals to us as unjust, we 
have given our attention to the problem of preventing interference with the 
"natural" course of development. This problem is still in process of solu- 
tion. The outlawing of rebates has brought forth an almost infinite variety 

344 



RAILWAY REGULATION 345 

of ingenious substitutes. As these have been relegated to outer darkness their 
places have been taken by others. After many years of strenuous effort we 
have not as yet succeeded in ridding ourselves of this "evil." In fact, it seems 
that its extirpation can be achieved only by a careful supervision of such 
matters as billing, the collection of claims, the making of purchases, etc. At 
present many discriminations are concealed in differences in service. We are 
realizing this, and service is beginning to be standardized by governmental 
authority. 

The problem of the railroad as a monopoly is also "in solution." The 
grant to the Interstate Commerce Commission of authority to set aside par- 
ticular rates has grown into the power to prescribe whole schedules of rates. 
With this process has come many new "problems." To prescribe "reasonable 
rates," the Commission has had to know costs. To determine these, it has 
been compelled, with the assent of Congress, to prescribe uniform accounting 
systems. The problem has further involved a determination "of what the 
investment would bear." This has necessitated an evaluation of the railroad 
properties of the country, an undertaking that will not be completed for many 
years. The intention, underlying this appraisal, is to limit proff^ts, by a 
limitation of rates, to a reasonable return. Recently, to quite different effect, 
the "eastern railroads" were granted permission to raise rates, their plea being 
one of insufficient profits. Together these things are indications of the devel- 
opment of a policy of limiting railroad dividends to a "fair figure" and of 
guaranteeing this modest income. In future it will most likely be found inex- 
pedient to meet the exigencies of certain dividends from a changing economic 
environment by a manipulation of rates. It is, therefore, more than possible 
that an effort will be made to accomplish this object by breaking the nexus 
between dividends and earnings from particular properties. This can be 
done by the substitution of general for particular securities. Such a general 
policy involves necessarily a regulation of the investments of the railroad. 

These implications of legislation and administration deserve more than 
passing notice. Our devotion to individualism is still strong; our faith in 
the efficacy of competition, even if shaken a bit, is still firm ; we still refuse 
to discuss government ownership as a practical question. But despite all this, 
we have created a system of government regulation which involves supervis- 
ing accounts, evaluating property, fixing rates, and standardizing service; 
which threatens supervision of expenditures and investments ; and which 
tends to limit the railroad to a definite guaranteed return on its investment. 
Control is very rapidly passing into the hands of the state. The step to the 
formal assumption of management and ownership is but a short one. It can 
be accomplished by a simple substitution of government bonds for railroad 
securities. Are we destined to take it? If we do, will'it be a simple matter 
of conscious choice? Or will it be a solution that has been forced upon us 
unwittingly through our attempt to solve isolated railroad problems one at a 
time? 

Thus it has come about that one "railroad problem" after another has 
been "solved," only to leave a bigger and more difficult problem in its place. 
The question of government ownership is more intricate than any of its prede- 
cessors. If the state does take over the roads, what will be the net gain? 
Will we be better off than we now are? Will we be better off than we would 
have been had we never embarked on a course of regulation? If our railroads 
are socialized, what is the effect likely to be in the solution of our other prob- 
lems, for instance that of monopoly? What influence is such a step likely to 
exert upon our theory of the relation of the state to industry and upon our 
fundamental "principles" and "concepts"? Are we thus for the last time 
dealing with the railroad problem in isolation, or is it likely to continue with 
us in ever-varied forms? Is government ownership a mere means of merg- 
ing a particular problem in the larger problem of the socialization of industry? 
After government ownership — what? 



346 CURRENT ECONOMIC PROBLEMS 

A. THE FUNDAMENTAL FACTORS OF THE PROBLEM 

173. The Extent o£ American Railway Interests^ 

BY I. IvEO SHARFMAN 

A discussion of the problems of railway regulation in the United 
States may well begin with a statement of the extent of the railway 
interests to be regulated. Some conception may be obtained of the 
magnitude of these railway interests by a consideration of the 
extent of mileage, the amount of equipment, the number of employ- 
ees engaged in the service, the amount of outstanding securities 
representing capital invested, the number of passengers and tons 
of freight carried, the revenues accruing from the service, the ex- 
penditures involved in rendering it, and the earnings distributed 
annually as a result of railway enterprise. There are more than 
250,000 miles of line in the United States, representing only single 
track mileage. If we include the length of second, third, and fourth 
tracks, and the mileage of yard tracks and sidings, the total mileage 
operated in the United States in 1910 was 351,767. The figures 
for equipment are equally stupendous. There were 58,947 loco- 
motives and 2,290,331 cars devoted to the service rendered by Amer- 
ican railways. The number of employees was 1,699,420 — the larg- 
est number of wage-earners engaged in any single American in- 
dustry with the exception of agriculture. The outstanding securi- 
ties amounted to $18,417,132,238, representing an investment in rail- 
way transportation which is likewise second only to agriculture. 
The number of passengers carried during the year 1910, earning 
revenue for the railroads, was 971,683,199; the number of tons of 
freight carried during the same year, earning revenue for the rail- 
roads was, 1,849,900,101. If we take distance into consideration 
and determine the number of passengers and the number of tons 
of freight carried one mile, the figures become so large as to pass 
beyond human conception. The number of passengers carried one 
mile was 32,338,496,329, and the number of tons of freight carried 
one mile was 255,016,910,451. The revenues from operation amount- 
ed to $2,750,667,435; the operating expenditures were $1,822,630,- 
433 ; and the earnings actually distributed as dividends during this 
single year amounted to $293,836,863. The immensity of these fig- 
ures must be apparent to every one, and no further comment is 
necessary to indicate the vast extent of American railway interests. 

^Adapted from an unpublished volume entitled Railway Regulation, soon 
to be published by the LaSalle Extension University. 



RAILWAY REGULATION 347 

174. The Dual Nature of the Railway Corporation 

We are all familiar with the easygoing classification of business 
enterprises into public and private. There is something quite satis- 
fying about the ready way in which this antithesis permits one to 
call the corner grocery a private business and the mail service a 
public enterprise. Since the two classes are all-comprehensive and 
mutually exclusive, it is quite unfortunate that their author was 
not possessed of the supreme pre-wisdom to make provision for 
the railway which in course of time was to appear, reach gigantic 
proportions, work itself into the whole fabric of the industrial sys- 
tem, and spoil a very serviceable antithesis. For the railway can 
be properly called neither a private nor a public enterprise; it par- 
takes of the nature of both. 

That it is a private enterprise is the more evident. You know 
that trains are run by a private corporation ; that the corporation 
sells you a ticket, thereby making a contract with you, to transport 
you from New York to Philadelphia ; that when Hiram Rankin's 
cow is run over, he brings suit against the New York Central & 
Hudson River Railroad Company; and that your next-door neigh- 
bor, James Street, regularly receives what he calls a dividend on 
the three shares of preferred stock which he owns in the Pennsyl- 
vania. So far as its actual business is concerned, it appears to you 
that a railway company is much like any other corporation. 

But if you will study a moment, you will see just as clearly 
that the business is of a public nature. You remember your grand- 
father telling you how, when he was a member of the state legis- 
lature back in the forties, he helped put through a bill which appro- 
priated state money to help the K. & W. build a line through your 
part of the state. You never heard of the state helping Simpkins, 
the corner grocer, in that way. You remember, too, just a few 
years ago, that when the L.R. & Q. was running the spur out to 
Dalton, Rufus Lunsford would not sell the narrow strip of land 
through his farm, which the company wanted to make a part of 
their right of way. You remember that he said that he was just 
as much entitled to that land as any private corporation was entitled 
to its property; and that no private corporation should get a foot 
of ground belonging to him. Yet you remember how it turned 
out — that there was a trial ; that the lawyers representing the rail- 
way said that the company has been clothed with the right of "emi- 
nent domain," and that this gave them the right to take Lunsford's 
property, if they needed it to complete their line, provided they 
paid him full compensation for it. You know, too, that the rail- 
way has no right to refuse to handle your freight, if you offer it to 



348 CURRENT ECONOMIC PROBLEMS 

them and if you comply with all the conditions. Perhaps you do 
not know that when the railway first came, it was thought of as a 
"rail" way, as a public highway upon which each man should be 
allowed to run his own cars, just as he drove his own carriage or 
wagon along the thoroughfare. Of course you see that technical 
difficulties prevented this from being done and led to a single cor- 
poration being granted an exclusive right to run trains over the 
road. But, in making the grant the state wa^ merely meeting the 
peculiar situation. It was not surrendering all of its rights to the 
private corporation. Thus you see that the railway corporation is 
of a public as well as of a private nature. 

175. The Economic Basis of Regulation^ 

BY I. LEO SHARFMAN 

The need of a system of governmental control arises from the 
economic characteristics of the railway. Most of the important 
questions involved in the so-called railroad problem can be traced 
to the economic character of the railway business. It is necessary, 
therefore, to indicate the general nature of those economic partic- 
ularities and their most striking consequences. 

The Monopolistic Charade}' of the Railway Business. The need 
of regulation depends chiefly upon the monopolistic character of the 
railway business. In ordinary industrial enterprises the existence 
of competition, when free and unrestricted by artificial means, pro- 
vides an automatic force for the protection of the public. High 
prices and large profits in a given industry tend to attract additional 
capital to that industry, which results, in the long run, in a read- 
justment of charges and a reduction of net returns. In like manner, 
inefificient service and g'oods of inferior quality cannot permanently 
be imposed upon the public because a policy w'hich is clearly detri- 
mental to- the interests of the consumer cannot permanently with- 
stand the force of competition. The railway business, on the other 
hand, tends to be operated under monopolistic conditions. To some 
extent railways are entirely exempt from the operation of compe- 
tition. The amount of capital necessary for the construction of a 
railway is so large and the task of railway building is so substantial 
that competition is always relatively slow in becoming active. Cap- 
italists will not unite sO' promptly in building a parallel road because 
of the larg-e sums that must be risked in the enterprise ; and even 
when they decide to enter upon such an undertaking, the work of 

^Adapted from an unpublished volume entitled Railway Regulation, soon 
to be published by the LaSalle Extension University. 



RAILWAY REGULATION 349 

construction requires so much time that the appearance of active 
competition is still further delayed. Moreover, even when the par- 
allel road is built, it actually competes with the original line only at 
certain points, usually the more important cities, while at inter- 
mediate points the lines separate and pass through numerous small 
communities which have no other railway facilities. At these non- 
competing points, then, the railways usually enjoy a monopoly of 
local traffic ; and while the number oi non-competing points is grad- 
ually being reduced by the construction O'f new steam roads and the 
multiplication of electric railway lines, doubtless, because of the 
very nature of the railway, there will always be many localities 
which, in the absence of government control, will be at the mercy 
of one transportation agency. In part, therefore, the railway busi- 
ness is clearly monopolistic in character. 

The Nature of Raikmy Competition. But the railway business 
tends to be carried on under monopolistic conditions even when 
competition does exist, because of the character of railway competi- 
tion. Railway rivalry tends to be abnormally keen and competition 
ruinous. This, in turn, leads to cooperation in various forms, and 
the inevitable result follows that railway competition becomes self- 
destructive. Competing railway companies, weary of the keen 
struggle which invariably ensues when competition becomes active, 
either assent tO' a truce whereby competition between them is abol- 
ished and an agreement is reached for the maintenance of rates, 
or they continue their warfare until one of the roads is driven to 
insolvency, and the unsuccessful line, upon reorganization, is taken 
over by its victorious rival. In either case effective competition 
is destroyed and monopoly conditions are established. The basis 
of this ruinous competition is tO' be found in two fundamental 
economic characteristics of the railway business : 

Joint Cost and Raihvay Management. The services of a rail- 
way are rendered to a very large degree at joint cost. From one- 
half to three-quarters of a railway's expenditures must be incurred 
regardless of the performance of any particular service. In order 
to conduct transportation at all, a roadbed must be provided, tracks 
must be laid, terminals must be built. This plant is equally neces- 
sary for the transportation of passengers and freight, and express 
and mail matter. Moreover, it is equally necessary for the trans- 
portation O'f different classes of passengers and different kinds of 
freight. The expenditures for the fundamental purpose of pro- 
viding the plant of a railway enterprise create the fixed charges 
of the business : and these fixed charges, the interest on the capital 
invested in the construction of the railway, form a part of the 



3 so CURRENT ECONOMIC PROBLEMS 

cost of every service rendered by that railway. As far as expendi- 
tures for plant are concerned, all railway operations are conducted 
at joint cost. But even the operating expenses are largely joint. 
The roadbed and equipment must be maintained in a state of reason- 
able repair and efficiency, and many of the employees and much of 
the material necessary for conducting transportation must be pro- 
vided and most of the general administrative expenses must be 
met, regardless of the amount or the kind of traffic carried by the 
railway. In other words, a substantial proportion of the operating 
expenses, like the fixed charges, are constant. It is practically im- 
possible, therefore, for the railwa}^ manager to ascertain the exact 
cost of a given service. Rate making mu-st necessarily involve a 
large degree of guesswork, though it is true that this guesswork 
is entrusted to experts. Railway officials have no means of de- 
termining with certainty that rates have been reduced to unprofit- 
able limits. Under the stress of keen competition, then, conditions 
are decidedly favorable to ruinous rate-cutting: and cutthroat com- 
petition invariably becomes self-destructive. 

Increasing Returns and Railway Policy. Railway operations 
are so largely conducted at joint cost because a very large propor- 
tion of railway expenditures are fixed or constant. If a railway is 
built and equipped and is carr}dng a given amount of traffic, it can 
usually handle a vastly increased quantity of business at a relatively 
slight additional expense. Within very wide limits, a given plant 
and equipment will accommodate a large as well as a small amount 
of traffic, and the only additional cost involved in handling an in- 
crease in traffic will consist in that portion of the operating ex- 
penses which varies with the amount and kind of service rendered. 
In other words, the expenditures of a railway company do' not 
keep pace with the services which it performs ; an increase in 
traffic does not involve a proportionate increase in railway ex- 
penditures. If follows, then, that with each increase in the amount 
of traffic carried, the cost per unit decreases ; and the net revenues 
of a railway increase faster than the growth of its traffic. The rail- 
way business is subject to the law of increasing returns: every in- 
crease in traffic results in more than a proportionate increase in 
profits. Railway traffic managers, therefore, work under a powerful 
incentive to increase the volume of their business, and the compe- 
tition for traffic is intense. In fact, the passion for traffic becomes 
the controlling passion of the railway business. Traffic managers 
consider it their most urgent duty to get business — to get it at the 
highest rates possible, but in any event to get it. The profitable 



RAILWAY REGULATION 3,51 

limit of rate reduction is so uncertain, because railway expenditures 
are largely joint, and the advantage of extensive traffic is so great, 
because railway expenditures are largely constant, that there is a 
natural and compelling tendency on the part of railway officials to 
reduce rates to whatever point may be necesary in order to attract 
business from competing lines. Ruinous rate wars follow and com- 
petition tends to destroy itself. These conditions lie at the basis of 
the abnormal character of railway competition which almost in- 
variably leads to railway operation under monopolistic conditions. 

Railway Competition and Discriminatory Practices. The keen 
rivalry for business leads not merely to rate wars and general rate 
cuttings, but to discriminatory practices as well. The passion for 
business is so intense that the traffic manager will resort to any 
means in order to get it. If the amount of railway traffic can be 
extended and hence the size of railway profits disproportionately 
increased by means of granting special privileges in the transpor- 
tation of one commodity as compared with another, or in the case 
of one person or locality as compared with competing shippers or 
markets, railway officials will not hesitate long to resort to these 
discriminatory practices. The history of American railways, and 
of our monopolistic industrial combinations or so-called trusts, di- 
vulges no greater evil than the granting of railway discriminations 
in rates and service for the benefit of one person, locality, or kind 
of traffic, to the prejudice and disadvantage of rival shippers, places, 
and industries. The motive or stimulus for these practices lies in 
the keen desire for additional business, with its disproportionate in- 
crease in railway profits. Discrimination has been one of the most 
baneful as well as one of the most certain effects of railway com- 
petition. 

Railway Discrimination and the Public Welfare. The danger 
as well as the injustice of discriminatory practices cannot be over- 
emphasized. If our industrial life is to reach its natural and most 
efficient economic development, there must be freedom of enter- 
prise and fairness of treatment for all persons, all sections, and 
all undertakings. In a sense, transportation is a fundamental in- 
dustry, underlying all others ; for it is essential to the conduct of 
all business and goes far towards determining the direction and 
conditions of industrial activity. The item of transportation, what- 
ever it may be, is one of the elements in all costs, and the outcome 
of competition between different producers may be largely affected 
by any divergence in railway rates which must be paid by each 
of two or more competitors. It follows clearly, then, that the 



352 CURRENT ECONOMIC PROBLEMS 

railway officials who make transportation rates exercise a tre- 
mendous power. By the soundness of their adjustment of rates 
and by the degree of fairness with which established rates are 
observed, the railways may profoundly affect — or absolutely de- 
termine even — the prosperity of individuals, of industries, of cities 
and towns, or of entire sections of the country. By discriminating 
between competing shippers, they may destroy the business of one 
and build up that oi another, making one man rich and another 
poor. By stimulating or discouraging a particular class of traffic 
they may increase or diminish the importance of industries and the 
extent of production of particular articles of commerce, shaping 
the direction of industrial activity. By discriminating among cities 
and towns, they may cause one to grow and another to decay, de- 
termining the commercial importance of business centres. By 
modifying their rate schedules in special instances, they may de- 
termine the location of industries, guiding the movements of popu- 
lation and affecting the prosperity and welfare of extensive local- 
ities. By these unfair practices the railways also have it within 
their power to build up industrial monopoly ; and the most power- 
ful of the trusts against which the people are now struggling made 
their first advances towards control of the market through the 
agency of special favors in the form of railway discriminations. 



176. The Futility of Railway Competition^ 

BY ARTHUR T. HADLEY 

We have been taught to regard competition as a natural, if not 
necessary, condition of all healthful business life. We accept, almost 
without reserve, the theory that, under open competition, the value 
of different goods will tend to be proportional to their cost of pro- 
duction. According to this idea, if the supply of a particular kind 
of goods is short, and the price comes to exceed cost of production, 
outside capital will be attracted into the business until the supply 
is sufficiently increased to meet the wants of the market. But as 
soon as this point is passed, and the price begins to fall below the 
cost of production^ people will refuse to produce at a disadvantage, 
the supply will be lessened, and the price will rise to its normal 
figure. If all this be true, competition furnishes a natural regulator 
of prices, with which it is* wicked to interfere. 

^Adapted from Railroad Transportation: Its History and Its Laws, 69-74 
Copyright by G. P. Putnam's Sons (1885). 



RAILWAY REGULATION 353 

This may once have been true, but it is not true today, that 
people find it to their interest to refuse to produce, if price drops 
below cost. To stop producing often involves the greater loss. 

Let us take an example from the railway business. A railroad 
connects two places not far apart, and carries from one to the other 
100,000 tons of freight a month at 25 cents a ton. Of the $25,000 
thus earned, $10,000 is paid out for the actual expenses of running 
the train and loading and unloading the cars ; $5,000 for repairs and 
general expenses ; the remaining $10,000 pays the interest on the 
cost of construction. Only the first of these items varies in pro- 
portion to the amount of business done; the interest is a fixed 
charge, and repairs have to be made with almost equal rapidity, 
whether the material wears out, rusts out, or washes out. Now 
suppose a parallel line is built, and in order to secure some of the 
business offers to take it at 20 cents a ton. The old road must meet 
the reduction in order not to lose its business, even though the new 
figure does not leave it a fair profit on the investment ; better a 
moderate profit than none at all. The new road reduces to 15 cents ; 
so does the old road. A 15-cent rate will not pay interest unless 
there are new business conditions developed by it ; but it will pay 
for repairs which otherwise would be a dead loss. The new road 
makes a still further reduction to 11 cents. This is better than 
nothing. If you take at 11 cents freight that costs you 25 cents to 
handle, you lose 14 cents on every ton you carry. If you refuse 
to take it at that rate, you lose 15 cents on every ton you do 
not carry. For your charges for interest and repairs run on, while 
the other road gets the business. 

Under competition such cases are of constant occurrence, and 
almost as a matter of course when one of the roads is bankrupt. 
"Business at any price rather than no business at all" is the motto 
of such a road. It has long ceased to pay interest ; it can pay for 
repairs by receiver's certificates ; and it will take freight at almost 
any price that will pay for the men to load the goods and the coal 
to burn in the engine. And it is to be observed that when a com- 
peting road does not carry the war tg this point, it is not a com- 
petitive rate. They may agree on a 25-cent rate, thinking it will 
be a reasonable and a paying one ; but such a rate is actually deter- 
mined by combination, even though they take cost of service into 
account. The theory that when payment falls below cost active 
competition will cease fails. This is because far below the point 
where it pays to do your own business it pays to steal business from 
another man. The influx of new capital will cease ; but the fight 



354 CURRENT ECONOMIC PROBLEMS 

will go on, either until the old investment and machinery are worn 
out, or until a pool of some sort is arranged. This is not confined 
to the railway business. Wherever there are large permanent invest- 
ments of capital we see the same cause at work in the same way. 

There is a marked difference between mercantile competition, 
such as was considered by those who established the old law of 
competition, and the competition of railroads or factories, such as 
we have been considering. In the former case its action is prompt 
and healthful, and does not go to extremes. If Grocer A sells goods 
below cost, Grocer B need not follow him, but simply stop selling 
for a time. For (i) This involves no great present loss to B. 
When his receipts stop, most of his expenses also stop. (2) It 
does involve present loss to A. If he is selling below cost, he loses 
more money, the more business he does. (3) It cannot continue 
indefinitely. If A returns to paying prices, B can again compete. 
If A continues to do business at a loss he will become bankrupt, 
and B will find the field clear again. 

But if Railroad A reduces charges on competitive business. 
Railroad B must follow, (i) It involves a great present loss to 
stop. If a railroad's business shrinks to almost nothing, a large 
part of its expenses run on just the same. Interest charges accumu- 
late; office expenses cannot be suddenly contracted; repairs do not 
stop when traffic sinks ; for they are rendered necessary by weather 
as well as by wear. (2) If B abandons the business, A's reduc- 
tions of rates will prove no loss. The expense of a large business 
is proportionately less than that of a small one. A rate which was 
below cost on 100,000 tons may be a paying one on 200,000. (3) 
Profitable or not, A's competition may be kept up indefinitely. The 
property may go into bankruptcy, but the railroad stays where it is. 
It only becomes a more reckless and irresponsible competitor. 

The competition of different stores finds a natural limit. It 
brings rates down near to cost of service, and then stops. The com- 
petition of railroads or factories finds no such natural limit. Wher- 
ever there is a large permanent investment, and large fixed charges, 
competition brings rates down below cost of service. The competi- 
tive business gives no money-to pay interest or repairs. Sometimes 
the money to pay for these things comes out of the pockets of other 
customers, who do not enjoy the benefit of the competition, and are 
charged much higher rates. Then we have the worst forms of dis- 
crimination. Sometimes the money cannot be obtained from any 
customers at all. Then we have bankruptcy, ruin to the investor, 
and — when these things happen on a large scale — a commercial 
crisis. 



i 



RAILWAY REGULATION 355 

B. DISCRIMINATORY PRACTICES OF THE 
RAILROADS 

177. Types of Railway Discrimination* 

BY GEORGE H. LEWIS 

Discriminations are principally of three kinds : first, discrimi- 
nations between commodities, leading to freight classifications ; sec- 
ond, discrimination between places, developing the "long-and-short- 
haul" problem ; third, discrimination between individuals. 

The first class of discriminations has gradually grown up from 
the practical experience of railroad men. In the earlier years of 
railroading the principles of classifying freight according to the 
character and value of the articles transported were little practiced. 
But it soon became evident that cheap and bulky articles must be 
carried at a low rate. But, if all rates were reduced to the standard 
of the cheaper goods, the road could not be maintained. To meet 
this exigency a charge of higher rates was made on the more costly 
commodities. In this way has gradually grown up the practice of 
freight classification. The principle underlying it is "charging what 
the traffic will bear." Proper classification alike benefits the roads 
and promotes the general good. But the principle is sometimes 
abused. For instance serious discrimination can be effected by 
placing in different classes two commodities physically alike or sub- 
stitutable for each other. 

The second class of discriminations is between places. It may 
happen that a director or prominent officer of a road is pecuniarily 
interested in one of two competing towns, and hence cheaper rates 
are accorded that place. In newer sections of the country, specu- 
lations in real estate by railroads, or by their officers, have often led 
to such discriminations. 

More important are those involved in what is known as the 
"long and short haul." This is the practice of giving to certain 
points on a railroad line lower rates than are accorded to interme- 
diate points which are, of course, nearer each other. To illustrate : 
The rates for a carload of freight from New York to points in Colo- 
rado are much higher than the rates on the same freight carried 
through the same town to San Francisco, more than a thousand 
miles farther. The regular traffic to San Francisco is about five- 
eighths of the rate to Ogden. In other words, the railroad charges 
for not hauling a carload of freight one thousand miles from Ogden 
to San Francisco. 

^Adapted from National Consolidation of the Railways in the United 
States, 80-105. Copyright by Dodd, Mead & Co. (1893). 



3S6 CURRENT ECONOMIC PROBLEMS. 

Another example will make even clearer the nature of this dis- 
crimination. A friend of mine a few years ago bought some anthra- 
cite coal in Chicago. He shipped it to Omaha, and then reshipped 
it to Grinnell, Iowa, 225 miles in an almost direct line toward Chi- 
cago. He was enabled thus to deliver the coal in that place cheaper 
than local coal dealers could supply it, although it had been hauled 
nearly three times the distance necessary to bring it to Grinnell 
directly. 

Thus the excessively low rates made to certain competitive points 
give an overwhelming advantage to shippers located there, and, as 
a result, business men are attracted to these points in great numbers. 
Likewise business establishments are driven away from points hav- 
ing excessively high rates. To illustrate : A large factory for 
making barbed wire, located in the city of Des Moines, abandoned 
its buildings and transferred its establishment to Chicago, finding 
that it saved a large sum on every carload that was shipped, although 
the wire was mainly carried through its old location, 360 miles 
nearer the Pacific Coast than Chicago. Cases like this have been 
abundant throughout the West. The long-and-short-haul practice 
has been one of the factors which have taken people from the small 
towns and crowded them into great cities. 

The third class of discriminations is that in favor of or against 
individuals. The principal device used in effecting this has been 
the well-known rebate. By this means favored shippers have been 
able to pay higher prices for grain or to sell flour for lower prices 
than their competitors and still grow rich. The most striking ex- 
ample is that of the Standard Oil Company, to which rebates 
amounting to $10,000,000 were paid in sixteen months. The com- 
pany gained its immense wealth largely from a skilful use of this 
class of discriminations. But the immensity of this serves to con- 
ceal the incalculably larger aggregate amount of rebates and draw- 
backs paid in the cities and towns throughout the South and West. 
In a single town in Iowa judgments for nearly $40,000 were recov- 
ered against a single railroad for illegal discriminations in that town 
alone. It is estimated that the total amount of these discriminations 
in northwestern Iowa will reach $1,000,000. These discriminations 
have all been subsequent to the Interstate Commerce Act. 

Old forms of discrimination are undoubtedly ceasing. But in 
the stress of competition which the system of private ownership of 
rival roads always necessitates, new devices and new schemes of 
evasion of the law are constantly arising in spite of the act. 



RAILWAY REGULATION 357 

178. Discriminations between Commodities^ 

BY albe;rt n. merritt 

Many instances of sudden and arbitrary changes in the differ- 
entials upon competing classes of commodities might be given, and 
frequently the public has suffered severe lo'SS in property values as 
the result of such actions. Take the case of the recent advance in 
the rate on corn-meal from Kansas points to Texas. For ten years 
the rate on cora-meal had been three cents higher than the rate on 
corn. On the basis of this differential the Kansas millers had 
found themselves able to compete with the Texas millers, and a 
large portion of the corn-meal used in Texas was ground in Kansas. 
In January, 1905, at the instigation of the millers of Texas, the 
Railroad Commission of that state announced a hearing for the 
purpose of determining whether intrastate grain rates should be 
reduced. In order to prevent this, the railroads went to the millers 
and made a bargain with them. If the millers would agree to drop 
their complaint before the Texas Commission, the railroads, on their 
part, would advance the rate on corn-meal so as to exclude the 
Kansas millers from the Texas market. The bargain was car- 
ried out to the letter. The millers failed to appear before the 
Commission upon the date set for the hearing, and the grain rates 
within the state were not reduced, while on the 19th of February, 
the railroads fulfilled their part of the contract by advancing the 
rate on corn-meal by an average of 5J/2 cents per 100 lbs., without 
any corresponding increase in the rate on corn. The result was 
that the Kansas millers were practically prohibited from shipping 
any corn-meal into the State of Texas. Thus the principal market 
of a very important industry of Kansas was swept away by the 
stroke of a pen. Not only will the Kansas millers lose, but the 
Texas consumers will lose also. Texas is unsuited for carrying on 
the milling industry. Mills were introduced into Texas more than 
twenty years ago. Yet the Kansas mills, handicapped as they were 
by a differential of three cents per 100 lbs., found themselves able 
to compete with the millers of Texas in supplying that market. 
The Texas millers have now secured the monopoly which they de- 
sired, and the Texas consumers will pay for it in the price of meal. 

On one occasion the railroads threatened tO' destroy the whole 
export flour industry of the Northwest. The rates on wheat and 
flour had been the same for many years. Suddenly the roads ad- 
vanced the rate on flour till they exceeded those on wheat by from 

^Adapted from Federal Regulation of Railroad Rates, 34-36. Copyright 
by Hart, Schaffner & Marx (1907). 



358 CURRENT ECONOMIC PROBLEMS 

four to eleven cents per loo lbs. The result was that the exports 
of flour instantly fell off as compared with those of w'heat. As 
long as these rates prevailed, the Western millers were entirely 
excluded from any share in the export flour trade. Not only did 
the milling industry of that section suffer, but also the resources of 
the country were weakened. Experts have declared that a most im- 
portant factor in maintaining the fertility of the soil is the con- 
sumption of the by-products of the grain near the point of produc- 
tion. But if the wheat is exported instead of being ground in the 
Northwest, such products as the bran and the shorts are consumed 
in Europe instead of in this country, as they would be if the wheat 
were ground at home. 

Other cases of unjust discrimination between competing classes 
of commodities have been of frequent occurrence. Thus two kinds 
of soap, though substantially similar in price, bulk, and value, were 
carried at different rates. In another case, common soap was car- 
ried at 33 cents per loo lbs., while 73 cents was charged for Pear- 
line, a competitor of soap. 

179. Discriminations in the Transportation of OiP 

Discriminations in the transportation of oil embrace a variety of 
forms, the most important of which are enumerated below. 

I. The most important form of discrimination is the use of 
secret or semisecret rates. The Standard Oil Company has repeat- 
edly asserted that since the passage of the Interstate Commerce Act 
in 1887 it has received no rebate. The investigations of the Bureau 
have discovered no rebates in this technical sense. But discrimina- 
tions fully as effective have been made in behalf of the Standard 
by means of secret rates concealed through other methods. The 
secret rates enjoyed by the Standard have almost all been made 
from points where the company is the only shipper. In such a case, 
however, it is just as discriminatory and just as injurious to the 
interests of competitors as if they were charged higher rates for 
the same hauls. The secrecy leaves the independent refiner in the 
dark as to the most important factor affecting competition in com- 
mon markets. To consummate the unfairness it is obviously not 
necessary that the independent should actually ship at the higher 
rate while the Standard ships at the lower. The evil is accomplished 
even more effectively if the existence of the lower rate allows the 
Standard to get to a common market while the rate quoted to the 
independent is so high that he is absolutely prevented from shipping 

"Adapted from Report of the Commissioner of Corporations on the Trans- 
portation of Petroleum, 1-2,1 (1906). 



RAILWAY REGULATION 359 

there. The secret rates already discovered by the Bureau represent 
a direct saving to the Standard of many hundreds of thousands of 
dollars annually. As a result the Standard has been able to sell oil, 
where necessary to meet competition, at prices which were profit- 
able to itself, but which kft no profit to a competitor. Having thus 
destroyed competition in large sections of the country, the Standard 
there charges prices several cents above the cost of manufacture. 
Thus the Standard has been able to obtain monopoly profits of large 
amount. 

Another device has been the use of secret state rates in combi- 
nation with interstate rates, more or less open in character, to give 
a total rate much less than the through published rate from the 
initial point of shipment to the final destination. There are other 
cases in which interstate shipments of oil have been made on a 
single through rate which has not been published or filed. There 
is a further important class of cases where rates, technically filed 
in compliance with law, are not made effectively public, and cannot 
be ascertained by shippers with the exercise of reasonable diligence. 
There are two sources of information for the ordinary shipper : 
inquiry at the offices of the railroad company, and the files of the 
Interstate Commerce Commission. The local freight agent cannot 
be expected to have knowledge of all possible combinations of rates ; 
or it may be the wilful intent of the railroad company to withhold 
information. The mass of tariffs filed by the railways with the 
Interstate Commerce Commission presents a problem so great as 
to be necessarily insoluble by the ordinary shipper. The matter is 
complicated by deliberate action on the part of the railroads. Tar- 
iffs are made to read from unexpected and improbable points, nam- 
ing rates which conflict with those conspicuously named from the 
neighboring points as to which inquiry would ordinarily be made. 
In other cases unexpected and improbable combinations of local 
rates are made which are lower than the conspicuously published 
through rates from the point of origin to the point of destination. 
Circuitous and unusual routes are selected in some cases in order 
to make up these combinations. The concealment is made the more 
effective by the frequent republication of the higher rates by the 
expected routes, and the use of lower rates by improbable routes. 

For the purpose of more effectively concealing the secret rates 
given the Standard, railroads have frequently used peculiar meth- 
ods of billing and accounting. In some cases oil has been "blind 
billed," that is to say, the way-bills have been made out showing the 
kind of product transported and its weight, but without showing, 
as is the usual custom, any freight rate or the amount of freight 



360 CURRENT ECONOMIC PROBLEMS 

charges. In such instances, the collection of freight is ordinarily 
made, not by the local agent, but through the central office, by the 
presentation to the Standard of a summary bill showing the amount 
of freight charges at the secret rate. In other instances the oil is 
handled in the same manner as other shipments are ordinarily han- 
dled, the secret rate being used directly, instead of the published 
rate, in the way-bills and records of the railroads, and the collection 
of charges being made in the ordinary manner through the local 
freight agent. Of course there is danger in this case that the rate 
will leak out. 

II. Secret discriminations are hardly more important than open 
discriminations in rates. Almost everywhere the rates from the 
shipping points used exclusively by the Standard are relatively lower 
than the rates from the shipping points of its competitors. Rates 
have been made low to let the Standard into markets, or they have 
been made high to keep their competitors out of markets. Trifling 
differences in distances have been made an excuse for large differ- 
ences in rates favorable to the Standard, while large differences in 
distances are ignored where they are against the Standard. Some- 
times connecting roads make through rates on oil which are lower 
than the combination of lower local rates ; sometimes they refuse 
to do so ; but in either case their policy favors the Standard. 
« III. There are in many parts of the country important discrim- 
inations with respect to the classification of petroleum and the rules 
under which it is transported. In many cases there are unreasonable 
differences between the rates on oil in carloads and less than car- 
loads. There are also unreasonable rules with respect to charges on 
oil in different kinds of containers ; and with respect to shipments 
of mixed carloads of different kinds of oil, rules which have been 
applied against independent refiners, but sometimes not against the 
Standard. 

An important instance of discrimination in classification is found 
with respect to the arbitrary rates fixed by the railroads in com- 
puting freight charges on the shipments of Kansas crude oil and 
the products derived therefrom. The eastern railroads have for 
years fixed the arbitrary weight on crude oil and all of its products 
alike at 6.4 pounds per gallon as a basis of freight charges. In 1902 
the railroads in the West raised the arbitrary weight on Kansas 
crude oil to 7.4 pounds, while continuing to carry all products of 
the refinery at 6.4 pounds. Fuel oil, which is the residuum of the 
refining process, the railroads have carried on the basis of 6.4 
pounds, although it actually weighs 7.6 pounds. This discrimina- 
tion has tended seriously to injure the Kansas crude-oil producer. 



RAILWAY REGULATION 361 

IV. Still another discrimination is practiced in the treatment 
of private tank cars. Throughout the country the Union Tank 
Line Company, a Standard concern, obtains three-fourths cent per 
car per mile as rental on its cylinder tank cars, whether loaded or 
empty. Owing to the relatively slow movement of tank cars, this 
allowance does not appear to result in an excessive profit. In most 
sections of the country all refiners operating tank cars receive equal 
treatment. On the Pacific Coast, however, most independent refiners 
receive only six-tenths cent per mile, and this on the loaded move- 
ment only. 



180. Recent Forms of Railway Discrimination^ 

BY WIIvIvIAM Z. RIPI,e;y 

With the passage of time, and especially since 1896, new and 
even more elaborate schemes for rebating have come to light. One 
of the most ingenious, which was discovered about 1904 to be very 
widespread, was the use of terminal or spur track railway com- 
panies. In Hutchinson, Kansas, for example, were salt works hav- 
ing a capacity of some 6,000 barrels a day. Two railways were 
available for shipments. A new company was incorporated, all its 
stock being held by the salt works owners, which constructed sidings 
to both railroad lines. The spur track was less than a mile long 
and cost only about $8,000 to build. But the company was chartered 
as the Hutchinson & Arkansas River Railroad. Its officers were the 
owners of the salt mills. It owned neither engines nor cars. Yet 
it entered into a traffic agreement with the Atchison road for a 
division of the through rate to many important points, its share 
being about twenty-five per cent. 

Obviously, rebates assuming the above-described form are open 
only to very large shippers, to whom it is worth while to incur the 
considerable expense. The International Harvester Company at 
Chicago had for years performed much of its own terminal service ; 
and until 1904 was allowed as high as $3.50 per car for switching 
charges by connecting railroads. It then incorporated the Illinois 
Northern Railroad, which was promptly conceded twenty per cent 
of all through rates, with the Missouri river rate as a maximum. 
On this traffic it would be allowed as high as $12 per car, instead of 
$3.50 as before. 

''Adapted from Railroads, Rates and Regulation, 195-209. Copyright by 
Longmans, Green & Co. (1912). 



362 CURRENT ECONOMIC PROBLEMS 

The so-called "midnight tariff" was a strictly legal way of con- 
ferring favors upon certain shippers. It was much in evidence dur- 
ing the grain wars between lines serving the Gulf ports about 1903. 
And it seems to have been a device used at times all over the country. 
A traffic manager wishing to steal all the business of a large shipper 
from some competing road, and to build himself up at the expense 
of his rivals, secretly agrees to put into effect a low rate on a given 
date. The shipper then enters into contracts calling for perhaps 
several hundred car-loads O'f grain to be delivered at that time. 
This reduction is publicly filed, perhaps thirty days in advance, with 
the Interstate Commerce Commission at Washington. But who is 
to discover it, in the great medley of new tariffs placed on file every 
day ? Yet this is not all. A second tariff, restoring the full rate, is 
also filed to take effect very shortly — perhaps only a day — after the 
reduction occurs. All these are public, and open to all shippers alike. 
But only the one who was forewarned is able to take advantage of 
them. 

An entirely different plan of rebating — and a most effective one 
— has to do with apparently unrelated commercial transactions. 
Many shippers are large sellers of supplies to the railroad. How 
easy then to make a concession in rates to an oil refinery, for ex- 
ample, by paying a little extra for the lubricating oil bought from 
a subsidiary concern. The Federal authorities in recent years, and 
especially in connection with the prosecution of the Standard Oil 
Company in 1908-1911, have discovered the most extraordinary 
variations in the prices paid by railroads for supplies. Independent 
concerns were often not allowed tO' compete in the sale of lubri- 
cants at all. It would be difficult to prove any connection between 
so widely separate sets of dealings ; and yet it is clear that rebates 
are often given in this way. Or even more fruitful as an ex- 
pedient, especially in these later days, when rebating is a serious 
offence, why not confer a favor. by extra liberality in allowances 
for damages to goods in transit? 

Personal discrimination may be as effective upon competition 
through denial of facilities to some shippers as through conferring 
of special favors upon others. P'ractices of this sort have been 
quite common in the coal business, especially in the matter of fur- 
nishing or refusing to furnish an ample supply of cars or suitable 
spur tracks to mines. In 1906 came the startling revelations upon 
the Pennsylvania Railroad as to the practice .of discrimination in 
furnishing cars to coal mines. A comprehensive investigation by 
the company itself resulted in the discharge of a number of high 
officials. It appeared, for example, that the assistant to President 



RAILWAY REGULATION 363 

Cassatt had acquired $307,000 in stock of coal companies without 
cost ; that a trainmaster for $500 had purchased coal mine stock 
which yielded an annual income of $30,000; and that one road fore- 
man was given three hundred shares of the same company stock for 
nothing. In all these cases the object was to secure not only an 
ample supply of cars for the favored companies, but perhaps even 
the denial oi suitable service to troublesome competitors. 

Yet other means of favoring large shippers at the expense of 
small ones are almost impossible to eradicate. The record of the 
vigorous prosecutions against rebating, under the Elkins law, af- 
fords conclusive evidences not only as to< the widespread extent of 
the evil, but as to its identification with many of the large industrial 
combinations. There was collected in fines for rebating between 
October, 1905, and March, 1907, the sum of $586,000. Several 
men were sent to jail, for from three to six months. Among the 
trusts implicated were the beef packers, who have been indefatigable 
in concocting rebating devices, the tin plate combination, and, most 
notable of all, the American Sugar Refining Company. Nearly 
$300,000 in fines was imposed upon this concern alone. The secret 
allowances in these cases were most ingeniously arranged. Some 
were "refund of .terminal charges ;" some were "lighterage de- 
murrage ;" some were allowances for damages. Many were paid 
by drafts instead of checks, so as to preclude identification of in- 
dividuals ; some were by special bank account ; but the sums in- 
volved were very large. 

The following quotation from a letter from an agent of the 
sugar trust accompanying a claim for overcharge of $6,866 on 
shipments of syrup, introduced in evidence in one of these cases, 
aptly describes the situation, both then, now, and always. "We 
hope to devise some means to enable us tO' conduct our freight mat- 
ters with the transportation companies satisfactorily even under the 
new conditions imposed by the Elkins bill ; but there may be some 
cases that cannot be taken care of, in the event of which we will, 
like all other shippers, have to take our medicine and look pleasant." 
The Interstate Commerce Commission reported as to the conditions 
in 1908 that "many shippers still enjoy illegal advantages." 

Thus the rebate as an evil in transportation, even since amend- 
ment of the law in 1906- 1910, while under control, is still far from 
being eradicated. Favoritism lurks in every covert, assuming al- 
most every hue and form. Practices which outwardly appear to be 
necessary and legitimate, have been shown to conceal special favors 
of a substantial sort. 



364 CURRENT ECONOMIC PROBLEMS 

C. THE NATURE AND EXTENT OF REGULATION 

181. Complaints against the Railroad System^ 

1. That local rates were unreasonably high, compared with 
through rates. 

2. That both local and through rates were unreasonably high 
at noncompeting points, either from the absence of competition or 
in consequence of pooling agreements that restricted its operation. 

3. That rates were established without apparent regard to the 
actual cost of the service performed, and are based largely on 
"what the traffic will bear." 

4. That unjustifiable discriminations were constantly made be- 
tween individuals in the rates charged for like service under similar 
circumstances. 

5. That improper discriminations were made between articles 
of freight and branches of business of a like character, and between 
different quantities of the same class of freight. 

6. That unreasonable discriminations were made between lo- 
calities similarly situated. 

7. That the effect of the prevailing policy of railroad manage- 
ment was, by an elaborate system of secret special rates, rebates, 
drawbacks and concessions, to foster monopoly, to enrich favored 
shippers, and to prevent free competition in many lines of trade 
in which the item of transportation is an important factor. 

8. That such favoritism and secrecy introduced an element of 
uncertainty into legitimate business that greatly retarded the devel- 
opment of our industries and commerce. 

9. That the secret cutting of rates and the sudden fluctuations 
that constantly took place were demoralizing tO' all business except 
that of a purely speculative character, and frequently occasioned 
great injustice and heavy losses. 

10. That, in the absence of national and uniform legislation, 
the railroads were able, by various devices, to avoid their respons- 
ibility as carriers, especially on shipments over more than one road, 
or from one State to another, and that shippers found great diffi- 
culty in recovering damages for loss of property or for injury 
thereto. 

11. That railroads refused to be bound by their own con- 
tracts, and arbitrarily collected large sums in the shape of over- 
charges, in addition to the rates agreed upon at the time of ship- 
ment. 

^Adapted from the Report of the Senate Select (Cullom) Committee on 
Interstate Commerce, I, 180-181 (if 



RAILWAY REGULATION 365 

12. That railroads often refused to recognize or be responsible 
for acts of dishonest agents acting under their authority. 

13. That the common law failed to afford a remedy for such 
grievances and that in cases of dispute the shipper was compelled 
to submit to the decision of the railroad manager or pool commis- 
sioner, or run the risk of incurring further losses by greater dis- 
criminations. 

14. That the differences in the classifications in use in various 
parts of the country, and sometimes for shipments over the same 
roads in dift'erent directions, were a fruitful source of misunder- 
standings, and were often made a means of extortion. 

15. That a privileged class was created by the granting of 
passes, and that the cost of the passenger service was largely in- 
creased by the extent of this abuse. 

16. That the capitalization and bonded indebtedness of the 
roads largely exceeded the actual cost of their construction or their 
present value, and that unreasonable rates were charged in the 
effort to pay dividends on watered stock and interest on bonds im- 
properly issued. 

17. That railroad corporations had improperly engaged in lines 
of business entirely distinct from that of transportation, and that 
undue advantages had been afforded to business enterprises in 
which railroad officials were interested. 

18. That the management of the railroad business was ex- 
travagant and wasteful, and that a heedless' tax was imposed upon 
the shipping and traveling public by the unnecessary expenditure of 
large sums in the maintenance of a costly force of agents engaged 
in a reckless strife for competitive business. 

182. The Provisions of the Interstate Commerce Act^ 

BY LOGAN G. MC PHERSON 

The Interstate Commerce Act, taking eifect April 5, 1887, 
practically applied the principles of the common law which inhere 
in the unlimited jurisdiction of the State courts to the regulation of 
interstate traffic by the Federal courts. It provided : 

First — That charges for transportation must be reasonable and 
just; prohibiting any unjust discrimination by special rates, rebates, 
or other devices, and any undue or unreasonable preferences ; 

'Adapted from The Working of the Railroads, 248-25^^ Copyright by 
Henry Holt & Co. (1907). 



366 CURRENT ECONOMIC PROBLEMS 

Second — That there should not be a greater charge for a short 
haul than for a long haul over the same line in the same direction 
under substantially similar circmnstances and conditions ; 

Third — Prohibited the pooling of freights and the division of 
earnings ; 

Fourth — Prohibited any device to prevent the continuous car- 
riage of freights ; 

Fifth — Provided for the publicity and filing with the Commis- 
sioner of all tariffs ; 

Sixth — The Interstate Commerce Commission created by the 
Act is given power to investigate complaints against carriers and 
to make reports of its investigation in writing; 

Seventh — The Interstate Commerce Commission is authorized, 
in case it finds that the carrier has violated the law, to order it to 
desist and make reparation for injury done. In case these orders 
are not obeyed the Commission is empowered to proceed in a sum- 
mary way to have the Circuit Court of the United States enforce 
them. 

183. The Provisions of the Elkins Act^° 

The Elkins law, approved February 19, 1903, is an amendment 
to the Act to Regulate Commerce, and the only important amend- 
ment since 1889. The former act is directed against wrongdoing 
both in the fixing of tariff rates and in the failure to apply them 
when they have been fixed. Broadly speaking it is the latter class 
of offenses only which are affected by the recent legislation. Its 
provisions are designed more effectually to reach infractions of law 
such as the payment of rebates and kindred practices. 

In the first place it makes the railroad corporation itself liable 
to prosecution in all cases where its officers or agents are liable 
under the former law. Such officers and agents continue to be 
liable as heretofore, but this liability is now extended to the corpora- 
tion which they represent. 

The amended law has abolished the penalty of imprisonment, and 
the only punishment now provided is the imposition of fines. As 
the corporation cannot be imprisoned or otherwise punished than 
by money penalties, it was deemed expedient that no greater pun- 
ishment be visited upon the offending officer or agent. 

Under the former law it was not sufficient to show that a secret 
and preferential rate had been allowed in a particular case; there 
had to be further proof of the payment of higher charges by some 

^"Adapted from the Seventeenth Annual Report of the Interstate Com- 
merce Commission, 8-10 (1903). 



RAILWAY REGULATION 367 

other person on like and contemporaneous shipments. The result 
was to render successful prosecutions almost impossible. This de- 
fect seems to have been remedied. The new law in most explicit 
terms makes the published tariff the standard of lawfulness, and 
any departure therefrom is declared to be a misdemeanor. It is 
sufficient now to show that a lower rate than that named in the 
tariff has been accorded. 

A further provision of the law makes it lawful to include as 
parties, in addition to the carrier complained of, all persons inter- 
ested in or affected by the matters involved in the proceeding. Un- 
der the former law carriers only could be made parties defendant; 
under the amended law shippers may also be included. 

Another provision confers jurisdiction upon the circuit courts 
of the United States to restrain departure from published rates, or 
"any discriminations forbidden by law," by writ of injunction, or 
by other appropriate process. 

184. The Provisions of the Hepburn BilP^ 

BY LOGAN G. MC PHKRSON 

The Hepburn Bill took effect on August 28, 1906, The bill pro- 
vides : 

(a) That as "common carriers" under the Interstate Com- 
merce Law shall be included companies transporting oil by pipe 
lines, express companies, sleeping car companies, all switches, 
tracks, terminal facilities, and that "transportation" under the law 
shall include all cars regardless of their ownership, and all service 
in transit. 

(b) Prohibits the issue of passes, with certain specified ex- 
ceptions that cover mainly employes, fixing a penalty in case of 
violation that shall apply to both the giver and the recipient. 

(c) Makes it unlawful after May ist, 1908, for any railroad 
company to transport for sale any commodities in which it may 
have a proprietary interest, except lumber and its products. 

(d) Provides that a common carrier shall provide, when 
practicable, and upon reasonable terms, a switch connection for any 
applicant who shall furnish sufficient business to justify its oper- 
ation. 

(e) Makes more explicit the specification as to the filing of 
tariffs, especially providing for the posting and filing of through 
tariffs ; fixing penalty for violation. 

^^ Adapted from The Working of the Railroads, 255-259. Copyright by- 
Henry Holt & Co. (1907)- 



368 CURRENT ECONOMIC PROBLEMS 

(f) Provides that "every person or corpoTation, whether car- 
rier or shipper, who shall knowingly offer, grant, give or solicit, 
or accept, or receive rebates, concession, or discrimination, shall be 
deemed guilty of a misdemeanor, and on conviction thereof shall 
be punished by a fine of not less than one thousand or more than 
twenty thousand dollars." Moreover, any person, whether officer 
or director, agent or employe, convicted of such misdemeanor, 
"shall be liable to imprisonment in the penitentiary for a term not 
exceeding twO' years, or both fine and imiprisonment in the discre- 
tion of the court." In addition, the acceptor of any rebate shall 
forfeit to the United States three times the amount of the rebate. 

(g) Provides for the publication of the reports and the de- 
cisions of the Commission and their acceptance as evidence. 

(h) Empowers the Commission, if upon complaint it finds 
that a rate, or any regulation or practice affecting a rate, is "Un- 
just or unreasonable, or unjustly discriminatory, or unduly prefer- 
ential or prejudicial," to determine and prescribe a maximum rate 
to be charged thereafter and modify the regulation or practice per- 
taining thereto. 

(i) Empovvers the Commission to award damages against a 
carrier in favor of a complainant. 

(j) Provides for forfeit to the United States, in case of neglect 
to obey an order of the Commission, in the sum of five thousand 
dollars for each offense, each violation and each day of its continu- 
ance to be deemed a separate offense. 

(k) Empowers the Commission tO' apply to a circuit court 
for the enforcement of its order, other than for the payment of 
money ; for the appeal by either party to the Supreme Court of the 
United States ; and that no order of the Commission shall be sus- 
pended or restrained, except on hearing, after not less than five 
days' notice to the Commission. 

(1) Provides for the rehearing by the Commission, upon ap- 
plication, at its discretion. 

(m) Authorizes the Commission tO' require annual reports 
from all common carriers, that shall contain specified information; 
to prescribe the form of any and all accounts, records and memor- 
anda to be kept by carriers, making it unlawful for the carriers to 
keep any other accounts, records, or memoranda than those pre- 
scribed and approved by the Commission ; provides that all accounts 
of the carriers shall be open to the inspection of the special agents, 
or examiners employed by the Commission. 

(n) Provides that a common carrier issuing a through bill of 
lading shall be responsible for loss, damage or injury to the prop- 



RAILWAY REGULATION 369 

erty covered thereby upon the lines of any company over which 
it may pass, leaving it to the line issuing the way-bill to gain re- 
covery from another line upon which the loss, damiage, or injury 
may have occurred. 

(o) Enlarges the Interstate Commerce Commission from five 
to seven members, with terms of seven years, increasing the salary 
from seven thousand five hundred to ten thousand dollars per 
annum. 

185. The Mann-Elkins Act^' 

The Interstate Commerce Bill, as it was reported out of confer- 
ence on June 14, contains the following provisions : 

1. It creates a court of commerce for the enforcement of orders 
of the Interstate Commerce Commission. ^^ 

2. It provides that no railroad shall charge any greater com- 
pensation for a shorter than for a longer haul, except in cases where 
such action is authorized after investigation by the Interstate Com- 
merce Commission. 

3. It provides that railroads shall be required to state in writ- 
ing the rate or charge applicable to a described shipment. 

4. The Interstate Commerce Commission upon complaint is 
authorized to determine and prescribe the just and reasonable indi- 
vidual or joint rate as the maximum to be charged and to specify 
the individual or joint classification, regulation, or practice which 
it deems to be fair, just, and reasonable. 

5. The commission may suspend the operation of any new 
rate, classification, regulation, or practice for a period not exceed- 
ing 120 days, and extend the time of suspension for a further period 
of six months, after which time the new rate, classification, regula- 
tion or practice will become effective unless the commission orders 
to the contrary. 

6. The commission may establish through routes and joint 
classifications and joint rates as to the maximum to be charged 
whenever the carriers themselves refuse to do so. 

7. The right is given to the shipper to designate one of several 
through routes by which his property shall be transported to its 
destination. 

8. Every failure to obey an order of the commission shall be 
punished by a fine of $5,000. 

^"Adapted from articles in the Railway and Engineering Review, L, 546- 
547, 587 (1910). 

^^This court was practically abolished in 1912 by the failure of Congress 
to make financial provision for its support. 



370 CURRENT ECONOMIC PROBLEMS 

9. Copies of classification, tariffs, etc., furnished to the com- 
mission shall be public records. 

10. Authority is granted for the appointment of a commission 
to report upon the advisability of the physical valuation of roads 
and the control of railroad capitalization. 

D. ASPECTS OF RATE-MAKING 

186. Freight Classification^* 

BY WIIvIvIAM Z. RIPLEY 

Imagine the Encyclopedia Britannica, a Chicago mail-order 
catalogue, and a United States protective tariff law blended in 
a single volume, and you have a freight classification as it exists 
in the United States at the present time. Such a classification is, 
first of all, a list of every possible commodity which may move by 
rail, from Academy or Artist's Board and Accoutrements to Xylo- 
phones aqd Zylonite. In this list one finds Algarovilla, Bagasse, 
"Pie Crust, Prepared;" Artificial Hanns, Cattle Tails and Wombat 
Skins ; Wings, Crutches, Cradles, Baby Jumpers and all ; together 
with Shoo Flies and Grave Vaults. Everything above, on, or under 
the earth will be found listed in such a volume. To grade justly 
all these commodities is obviously a task of the utmost nicety. A 
few of the delicate questions which have puzzled the Interstate 
Commerce Commission may give some idea of the complexity of 
the problem. Shall cow peas pay freight as "vegetables, N. O. S., 
dried or evaporated," or as "fertilizer" — being an active agent in 
soil regeneration? Are "iron-handled bristle shoe-blacking daub- 
ers" machinery or toilet appliances? Are patent medicines dis- 
tinguishable, for purposes of transportation, from other alcoholic 
beverages used as tonics? What is the difference, as regards rail 
carriage, between a percolator and an every-day coffee pot? Are 
Grandpa's Wonder Soap and Pearline to be put in different classes, 
according to their uses or their market price ? When is a boiler not 
a boiler? If it be used for heating purposes rather than steam gen- 
eration, why is it not a stove? What is the difference between 
raisins and other dried fruits, unless perchance the carrier has not 
yet established one industry while another is already firmly rooted 
and safe against competition? 

The classification of all these articles is a factor of primary im- 
portance in the making of freight rates both from a public and 

^^Adapted from Railroads, Rates and Regulation, 297-304. Copyright by 
Longmans, Green & Co. (1912). 



RAILWAY REGULATION 371 

private point of view. Its public importance has not been fully 
appreciated until recently as affecting the general level of railway 
charges. So little was its significance understood, that supervision 
and control of classification were not apparently contemplated by 
the original Act to Regulate Commerce of 1887. The anomaly ex- 
isted for many years of a grant of power intended to regulate 
freight rates, which, at the same time, omiitted provision for control 
over a fundamentally important element in their make-up. Control 
over it has now been assured beyond possibility of dispute. 

The freight rate upon a particular commodity between any 
given points is compounded O'f twO' separate and distinct factors : 
one haAnng to do with the nature oi the haul, the other with the 
nature of the goods themselves. Two distinct publications must be 
consulted in order to^ determine the actual charge. Although both 
of them usually bear the name of the railway and are issued over 
its signature, they emanate, nevertheless, from entirely different 
sources. The first of these is known as the Freight Tariff. It 
specifies rates in cents per hundred pounds for a number of differ- 
ent classes of freight, numerically designated, between all the 
places upon each line or its connections. But it does not 
mention specific commodities. The second publication which 
must be consulted supplies this defect. This is known as the 
Classification. Its function is to group all articles more or less 
alike in character, so far as they affect transportation cost, or are 
affected in value by carriage from place tO' place. These groups 
correspond to the several numerical classes already named in the 
freight tariff. Thus dry goods or boots and shoes are designated 
as first class. It thus appears, as has been said, that a freight rate 
is made up of two distinct elements equalin importance. The first 
is the charge corresponding to the distance ; the other is the charge 
as determined by the character of the goods. Consequently, a vari- 
ation in either one of the two would result in changing the final 
rate as compounded. 

Freight tariffs and classifications are as distinct and independent 
in source as they are in nature. Tariffs are issued by each railway, 
by and for itself alone and upon its sole authority. Classifications, 
on the other hand, do not originate with particular railways at all ; 
but are issued for them by cooperative bodies, known as classifi- 
cation committees. These committees are compo^sed of represen- 
tatives from all the carriers operating within certain designated 
territories. In other words, the United States is apportioned among 
a number of committees, to each of which is delegated, by the car- 
riers concerned, the power over classification. New editions of 



372 CURRENT ECONOMIC PROBLEMS 

these classifications are published from tim:e to time as called for 
by additions or amendments, the latest, of course, superseding all 
earlier ones. Thirty-seven such issues have already appeared in 
series in trunk lines and southern territory, while fifty have been 
put forth in western territory, since the practice was standardized 
in 1888. 

187. Competitive Factors in Rate-Making^^ 

BY EMORY R. JOHNSON AND GROVER C HUEBNER 

Railroad rates are, tO' a large extent, the resultant of competitive 
forces. In part the competition is of carriers with each other for 
traffic free to move by more than one line; and, in a still larger 
way, the competition is between industries and among rival pro- 
ducing or trading centers and sections. If a railroad company is 
to prosper, the industries along its lines, the section of country it 
serves, and the markets it reaches must flourish. 

In determining the rates which the traffic will bear, the General 
Freight Agent is influenced by many factors. The strongest force 
is that of competition among markets, ot "oi interregional, indus- 
trial competition." The asphalt of California, for example, com- 
petes against that of Texas, the West Indies and South America, 
in American cities, and railway rates on the California product 
must be fixed so as to give a wide sale. Likewise the rates on cotton 
goods from southern mills are made so as tO' allow" them to find a 
market side by side with the output of New England mills. In- 
numerable instances of interregional competition in manufacturing 
might be cited. The finished product must be carried to market 
in rivalry with similar goods from other sections, while raw pro- 
ducts and coal must be hauled to the factories at rates which will 
allow all industries to thrive. Were there no indirect bidding of 
one railway for the traffic of another, this all-pervading competition 
between producing regions would still exert a constant regulative 
pressure upon the level of rates. 

Among the markets themselves the same forces of commercial 
competition are effective. The Gulf ports compete with the North 
Atlantic ports for the grain exports of the West, and the North 
Atlantic ports strive with each other for this trade. The Gulf ports 
struggle with those of the South Atlantic for the cotton of the 
interior ; New Orleans is the rival of Galveston. 

"Adapted from Railroad Traffic and Rates, I, 351-359- Copyright by D. 
Appleton & Co. (191 1). 



RAILWAY REGULATION 373 

It is chiefly because of the force of commercial competition that 
freight rates are to a large extent interdependent. To change an 
unimportant rate may require the modification of but a few others, 
but to raise or lower the rate on wheat from Chicago to New York 
may require the readjustment of many other charges. The rate 
structure, like a spider's web, is delicately interwoven. 

Rival markets and competing producing sections, no matter 
where located, will be kept on a common level, if it is possible for 
the carriers to so place them. At the present time the railways as 
well as the public realize that artificial limits must often be placed 
upon interregional competition. 

The efforts of rival railways tO' secure traffic free to move by 
more than one line is a second force influencing the rate maker. Un- 
like the commercial competition just mentioned, it has become less 
instead of more powerful ; because, as time goes on, it is more 
largely regulated by the consolidation of competing lines, or by 
traffic associations, community-of-interest arrangements, and in- 
formal mutual understandings. These are the means whereby rival 
railways have sought to- substitute cooperation for unrestrained 
competition. This fact is well illustrated by the perennial strife of 
the trunk lines over the relative rates to be accorded North Atlantic 
seaports on a traffic to and from the central West. 

The fact that the competition among railroads is in service rather 
than on the basis of secret rates enables the railways to regulate 
their struggles so^ as tO' prevent most, if not all, rate wars ; but reg- 
ulated competition that stops short of open war may not only be 
perpetual, but may also' be keen, and may be effective in determin- 
ing both the charges on particular commodities and the general 
level of rates. From the public point of view, this interrailway 
competition may not be an adequate regulator of rates; indeed, it 
may, like interregional industrial competition, lead to arbitrary dis- 
criminations that require correction by public authority ; but this 
does not prove the absence or impotency of competition among rail- 
roads to secure traffic free to move by more than one route. 

The influence of water competition upon the policy and practice 
of railway rate making, though less general and less controlling 
now than formerh^, is still a factor of much effect in several parts 
of the country ; and the practical certainty of a general improvement 
of the inland waterways of the United States indicates that water 
competition will be more potent in the future than it is at the pres- 
ent time. 



374 CURRENT ECONOMIC PROBLEMS 

The rail charges into and out of the Southern States and the 
system of rates that has developed in that section, are largely influ- 
enced by the competitive rates and service of the coastwise vessels. 
Likewise the rates on the transcontinental traffic moving west and 
east between the Atlantic and Pacific sections of the United States 
are absolutely controlled by the competition of the water routes 
via Panama and the Isthmus of Tehuantepec. Moreover, it should 
be specially noted that water competition not only controls certain 
specific railway charges, but also exerts much influence upon the 
general systems of rate making prevailing in different sections of 
the country. 

Railway rates in the future will probably be increasingly sub- 
ject to the regulation of waterway competition. 

1 88. The Futility o£ Costs as a Basis for Rates" 

BY SYDNEY CHARI^ES WILLIAMS 

The theory of price-determination according to cost of produc- 
tion is usually interpreted to mean that the price of each unit is 
determined ultimately by the cost of production of that unit. Where 
the unit is large and simple, e. g., in the case of a boat constructed 
entirely by hand by one man, the only items of expense will be the 
material, the man's labour, and some trifling sum to cover the cost 
and wear and tear of his tools ; and the price he will ask will be 
determined accordingly. Modern industrial conditions, however, 
are much more complicated. A factory or workshop will turn out 
very many units of many different kinds ; involving raw material 
of varying values, processes of all kinds, simple and elaborate, 
machinery and labour of many sorts, and each unit of each kind 
must bear some proportion of those general charges which cannot 
be attributed to any one class of product, but must be borne by the 
whole. 

Now to what extent is it the case that the price charged for each 
unit of railway transport is determined by the cost of producing 
that unit? At first sight it may seem; a very simple and satisfactory 
method of arriving at railway charges. The commodity produced 
is one — and its cost per unit can be arrived at, and the price to be 
charged fixed accordingly. But this seeming simplicity is very far 
from being present in reality. For when we begin to think of con- 
crete instances of railway transport we see that they include com- 
modities very diverse indeed. There are in the first place very 

^"Adapted from The Economics of Railway Transport, 189-198 (1909). 



RAILWAY REGULATION 375 

many kinds of haulage, pure and simple — for long distances, me- 
dium distances, and short distances, with a cost per mile varying 
according to the distance; there is haulage of all kinds of goods, 
from coal and limestone to fruit, flowers, dynamite, and cigars, and 
of all manner of passeng'ers, from a Royal party in a special train, 
or first-class express traffic to the Scotch moors, to workmen's jour- 
neys at 12 miles a penny or half -day seaside trips at similar low 
charges ; there are also- many subsidiary services sometimes given, 
sometimes expressly withheld — cartage, delivery, liability for dam- 
age or loss, refrigeration, use of company's wagons, express speed 
or slow travel, and so forth. In short, we see that the use of the 
purely abstract word "transport" gives a quite misleading air of 
simplicity to what is really a congeries of operations of the most 
diverse kind. Railways in fact produce a far greater variety of 
commodities than most industrial undertakings. 

But it may be urged, this does not demonstrate the impossibility 
of basing your railway charges on respective costs of production. 
This may be done in one or other of two ways. The first and most 
obvious method is to classify your different services and apportion 
to each the peculiar expenses connected with it. Then take the 
whole of the remaining expenditure of a general kind and appor- 
tion that among the different services according to their respective 
prime costs. You will now know the expenditure involved by each 
service; and as you know the extent of this traffic you will be able 
to fix a fair and reasonable charge which will just give you your 
expenditure with a reasonable margin of profit. 

If the matter is so simple it should be child's work to apply it 
to the first great division of railway work, that between passenger 
and goods traffic. The simplest and clearest subdivision of railway 
working expenditure is as follows : General Charges, Ways and 
Works, Rolling-Stock, Traffic Department Expenditure. 

Now of all these a good deal is not merely independent of any 
particular kind of traffic but is independent of traffic altogether. 
Among such heads of expenditure are directors' fees, the salaries 
of the managing and legal staff, the rates and taxes paid, the 
greater part of the cost of maintenance of way and works, and 
some part of the traffic working expenses. These items clearly 
cannot be directly connected with the respective amounts of goods 
or passenger traffic. The cost of passenger and goods locomotives 
and rolling-stock can, however, be so allocated ; so also the cost of 
their respective train-staffs; and some part of the expenditure of 
buildings. Indeed, the very variety of methods adopted to secure 
this allocation themselves testify to the difficulty of the operation; 



376 CURRENT ECONOMIC PROBLEMS 

train-mileage has been tried and abandoned, working engine hours 
are believed in by some, but the only unanimity among experts is 
as to the caution with which the figures arrived at must be viewed 
and utilized. 

The varying speeds, the different kinds of accommodation, the 
great variety in the number and complexity of the services ren- 
dered, the different sizes of consignments, the different distances 
for which, the different directions in which, and the different times 
at which they travel — all these mean some difference in cost; but 
since this cost is made up of sO' many countless items, who can 
undertake to reduce it tO' a definite schedule of fair prices, how- 
ever long and complicated? And to achieve a result of even use- 
ful accuracy when these difficulties are borne in mind, and at the 
same time it is remembered that the schedule must be simple, uni- 
form., impartial, semi-permanent, and, moreover, must be known be- 
fore, not after the consignment has been handled — is, it will be 
recognized, indeed a hopeless task. 

But it may be claimed that there is an alternative method with 
which no such accuracy is expected or desired. All that need be 
done is to take the number of units of work done, the passenger- 
miles and ton-miles, and dividing these by the aggregate expenses, 
so obtain an average figure which will give a working basis for 
all rates. But even for this less ambitious project there are insuper- 
able difficulties. The average ton-mile will link together such 
dissimilar units as one ton of coal out of a train load of 800 tons 
carried, say, 200 miles without a stop and with no auxiliary ser- 
vices, and a ton of cream cheese carried in small consignments over 
a few miles with many subsidiary services, collection, delivery, pack- 
ing, weigliing, and so forth. The respective rates charged will be 
as dissimilar as the services rendered. The coal pays a very low 
rate, but the size, regularity, and easy handling of the traffic make 
it most acceptable; the cheese traffic pays a high rate, but not too 
high in view of the care and work it involves. Its very small and 
variable dimensions, and the high value of the cheese, make the 
cost of the transit an appreciable item, besides say the profits of 
the retail trader, and an addition to the price which the well-to-do 
consumer willingly if unconsciously pays. Apply such an average 
figure in defiance of all these differing conditions, and the result 
will only be to kill the low grade traffic and to let O'ff too lightly the 
high grade traffic, thereby seriously impairing the prosperity of the 
railway and ultimately injuring the trading public which needs its 
services. 



RAILWAY REGULATION • 377 

189. Charging What the Traffic Will Bear" 

BY W. M. ACKWORTH 

The phrase "charging what the traffic will bear" has, for some 
not very obvious reason, undoubtedly acquired an ill repute. On 
the face of it, it surely seems to represent a principle, not of extor- 
tion, but of moderation. To charge what the traffic can bear is, in 
other words, not to charge what the traffic cannot bear. Yet the 
phrase is commonly understood quite differently. It has been as- 
serted that railway managers claim to estimate for themselves pro- 
duction cost at A and selling price at B, and to appropriate as rail- 
way rate the entire difference. The truth is that, whatever rash 
statements have been made by individual railway men under pecu- 
liar conditions, no railway administration has ever acted on any 
such principle. 

The real meaning of the phrase is that within limits — the su- 
preme limit of what any particular traffic can afford to pay, and the 
inferior limit of what the railroad can afford to carry it for — rail- 
way charges for different categories of traffic are fixed, not accord- 
ing to an estimated cost of service, but roughly on the principle 
of equality of sacrifice by the payer. So regarded, "what the traffic 
will bear" is a principle, not of extortion, but of equitable conces- 
sion to the weaker members of the community. Had railway man- 
agers in the past declared that their principle was "tempering the 
wind to the shorn lamb," their descriptive accuracy would have 
been great, while their popularity might have been even greater. 
Somehow the total cost of maintaining and operating the railway 
has to be paid for ; broadly and in the long run, the capital invested 
in railway construction must be remunerated at the normal rate of 
interest. Can any system of apportionment of this necessary ex- 
penditure be more equitable than one under which the rich — well- 
to-do passengers, valuable freight, traffic with the advantage of 
geographical situation close to the markets, and the like — contribute 
of their abundance ; while the poor — immigrant passengers, bulky 
articles of small value, traffic that has to travel far to find a market, 
and so forth — are let off lightly on the ground of their poverty? 
Translated into railway language the principle means this : the total 
railway revenue is made up of rates which, in the case of traffic 
unable to bear a high rate, are so low as to cover hardly more than 
the actual out-of-pocket expenses ; which, in the case of medium- 
class traffic, cover both out-of-pocket expenses and a proportionate 
part of the unappropriated cost; and which finally, in the case of 

'■^Adapted from The Elements of Railway Economics, 75-78. Published 
by the Clarendon Press, Oxford (1904). 



378 • CURRENT ECONOMIC PROBLEMS 

high-grade traffic, after covering the traffic's own out-of-pocket 
expenses, leaves a large and disproportionate surplus available as 
a contribution toward the unappropriated expenses of the low-class 
traffic, which such traffic itself could not afford to pay. 

This, in principle and in outline, is the system of charging what 
the traffic can bear. It is the system which is, always has been, 
and always must be adopted on all railways, whether they be state 
enterprises or private undertakings. It is a system at once in the 
interest of the railway, because even the lowest class traffic, by 
whatever small amount its rates exceed the additional cost of doing 
the business, contributes to the general expenses of the undertaking; 
in the interest of the public, because traffic is thereby made possible 
which could not come into existence at all, if each item of traffic 
were required to bear, not only its direct expenses, but its full share 
of all the standing charges ; and in the interest of the high-grade 
traffic, because everything which the low-grade traffic pays beyond 
its own actual out-of-pocket cost helps to defray the general expenses 
of the undertaking, which otherwise the high-grade traffic would 
have to bear unaided. 



190. The Rate Theory of the Interstate Commerce Commissions^ 

BY M. B. HAMMOND 

The tendency of the Interstate Commerce Commiission's decis- 
ions is, on the whole, towards a cost of service theory of rate mak- 
ing. The following is an attempt at the task of so stating a theory 
of rates as to bring in the various considerations which the Com- 
mission has emphasized as factors in rate making, and show how 
they can be related to the fundamental principle. It is perhaps well 
to say that nowhere has the Commission undertaken to state such a 
comprehensive theory of rate miaking. 

1. In any system of government-made or government-regulated 
railway rates, it wold seem that this fundamental economic principle 
should be kept in mind : to perform the service of transporting per- 
sons and goods with the least possible expenditure of social energy. 

2. One transportation route or one transportation system 
should never be allowed to take from another route or system, 
merely as a consequence of competition, traffic which the latter route 
or system can carry at less expense. 

^^Adapted from Railroad Rate Theories of the Interstate Commerce Com- 
mission, 192-195. Copyright by the Quarterly lournal of Economics and by 
Harvard University (1911). 



RAILWAY REGULATION 379 

3. Rates should be so' adjusted as never to take from a place 
its natural geographical advantages of location; but natural advan- 
tages should not be sO' construed as to mean monopoly privileges. 

4. Railway rates as a whole should just cover costs as a whole 
allowing for a normal rate of return on capital actually invested, 
a normal return for labor of all sorts, and for depreciation, but not 
for betterments. This would not mean that superior efficiency in 
railway management was not entitled to- reap the rewards of its 
superiority in the same way it does in the ordinary industrial es- 
tablishment where competition rules. On the other hand, the rule 
must not be construed to mean that any investment in a railroad, 
no matter how fooilishly or recklessly made, is entitled to exact high 
rates from persons and industries along the line in order to earn 
current interest rates or dividends. Railway property is not more 
sacred than other property, nor are railway investors immune from 
the consequences of their own acts. 

5. Each commodity transported should, as far as possible, be 
made to defray its own share, not only of operating and terminal 
costs, but also of the fixed costs and dividends. It is possible under 
modern accounting methods to determine these costs with an ap- 
proximate degree of accuracy for the principal commodities and 
classes of traffic. The rates on other commodities may be deter- 
mined by comparing their ascertainable costs with those of the 
principal commodities, and to a lesser extent by a comparison of 
the relative values of the commodities. 

6. Differences in distance may be made a test of the reason- 
ableness of differences in rates where other conditions appear to 
be similar; yet the general rule must be kept in mind that though 
the aggregate charge should increase as distance increases, the ton- 
mile rate should decrease. 

7. Where the application of none of the above principles seems 
practicable, competition, which has been conducted in a normal 
manner over a period of several years, may be assumed to have es- 
tablished a fair relation of rates. 

8. A reasonable rate is one which yields a reasonable compen- 
sation for the service rendered. If a given rate is reasonable in 
this sense, an increase in the price of the commodity or in the 
profits to the producer will not be a valid excuse for increasing the 
railway rate. The carrier will justly share in the increased pros- 
perity of the producer by securing a larger traffic in this com- 
modity. 

The possibility of applying these rules to the business of rail- 
way transportation is proved by the fact that the application of 



380 CURRENT ECONOMIC PROBLEMS 

every one of them can be shown by illustrations taken from the 
Commission's decisions. Their consistent application would mean 
that the railroads would neither tax the industries of the country 
nor have their own. investments sacrificed ; they would not build 
up one place of industry ; they would not take from some persons 
or commodities their proportioniate share of the costs of transpor- 
tation and impose them upon other persons and commodities ; and 
finally they would not by their system of rate making retard indus- 
trial progress or have their own development hindered by failing 
credit or lack of revenue. 



E. VALUATION OF THE RAILROADS 
191. Necessity for Valuation of Railway Property^^ 

The Commission desires to reaffirm its opinion that it would be 
wise for Congress to make provision for a physical valuation of 
railway property. The increased responsibilities imposed upon the 
Commission make continually clearer the importance of an authori- 
tative valuation of railway property, made in a uniform manner for 
all carriers in all parts of the country. 

In the first place, the Commission has been called upon to pass 
judgment upon certain rate cases, in which the reasonableness of a 
general level of rates was brought into question, and for such cases 
one of the most important considerations is the amount of profit 
secured to the investment. The actual investment in an enterprise 
needed for giving the public adequate transportation facilities is 
entitled to a reasonable return, and no more than a reasonable 
return, in the form of a constant profit; and a reasonable schedule 
of rates is one that will produce such a return. 
• There is a growing tendency on the part of carriers to meet 
attacks upon their rates by making proof, through their own ex- 
perts, of the cost of reproducing their physical properties. It is 
obviously impossible for shippers who are complainants in such 
cases to meet and rebut such testimony, or even intelligently cross- 
examine the railroad witness by whom such proof is made. In 
addition to the large expense of retaining experts competent to 
make such investigations, the shippers have no access to the prop- 
erty of the carriers or to their records showing the cost of con- 
struction and other necessary information. The carriers, on the 
other hand, having access to the records and property, can use the 

^'Adapted from the Twenty-Second Annual Report of the Interstate Com- 
merce Commission, 83-85 (1908). 



RAILWAY REGULATION 381 

information compiled from them or not, in any given case, as their 
interests may require. 

A second consideration is the importance which the question of 
capitaHzation has assumed in recent years. No one at the present 
time can say whether railways are undercapitalized or overcapital- 
ized. A valuation adequate to this problem should not stop with 
the simple statement of an amount; on the contrary, it should ana- 
lyze the amount ascertained according to the sources from which 
the value accrues and show the economic character as well as the 
industrial significance of the several forms of value. 

A third argument is found in the present unsatisfactory condi- 
tion of railway balance sheets. The balance sheet is, perhaps, the 
most important of the statements that may be drawn from the 
accounts of corporations ; for, if correctly drawn, it contains not 
only a classified statement of corporate assets and corporate liabili- 
ties, but it provides in the balance, that is to say, the "profit and 
loss," a quick and trustworthy measure of the success that has 
attended the operation and management of the property. Every 
balance sheet begins with "cost of property," against which is set a 
figure which purports to stand for the investment. At present no 
court, commission, accountant, or financial writer would for a mo- 
ment consider the present balance sheet statement, purporting to 
give the "cost of property," even in a remote degree, as a reliable 
measure either of the money invested or of present value. Thus, 
at the first touch of critical analysis, the balance sheets of American 
railways are found to be inadequate. They are incapable of ren- 
dering the service which may rightly be demanded of them. The 
only possible cure for such a situation is for the government to 
make an authoritative valuation of railway property, and to pro- 
vide that the amounts so determined be entered upon the books of 
the carriers as the accepted measure of capital assets.^" 

192. Market Value as a Basis for Rates^^ 

BY ROBERT H. WHITTe;n 

The theory that rates should be based upon market value would 
allow the railroads a return on monopoly value from' favorable 
location. Such a monopoly value is not usually claimed for utili- 
ties. It is somewhat similar to the claim that location in the city 

^°An Act o£ Congress, of March i, 1913, provided for the valuation of the 
property of all common carriers in the United States under the direction of 
the Interstate Commerce Commission. 

^^ Adapted from Valuation of Public Service Corporations, S3-SS. Copy- 
right by the author (1912). 



382 CURRENT ECONOMIC PROBLEMS 

streets under a franchise can be capitalized for rate valuation pur- 
poses. A closer parallel, however, is the case of a water supply 
plant that has secured the most economical source of supply. It is 
inconsistent with what is believed to be the governing principle of 
justice and equity which forms the basis of public service control, 
that rates should be increased, in order to pay a return on the 
capitalized value of exclusive location or other monopoly advantage 
that represents no actual investment. A railroad exercises the right 
of eminent domain to secure its location and the right of eminent 
domain can only be lawfully exercised for a public purpose. The 
location secured by this method for a public purpose cannot justly 
create a monopoly that will be capitalized against the very public 
purpose that it was intended to serye^ — the transportation of freight 
and passengers. 

By the above method rates are based on cost, but not necessarily 
on the cost of the road itself, but in many cases on the cost of a 
competing or hypothetical road. Market value has nothing to do 
with the rate question as thus considered. It is only set up after 
the rates are in fact determined. To' be sure, the theory is that rates 
are based on a fair return on the market value of the road under 
reasonable rates. The impossibility of basing reasonable rates on 
a market value that is itself determined by reasonable rates is appar- 
ent. It is a clear case of reasoning in a circle. We have the evi- 
dent absurdity of requiring the answer to the problem before we 
can undertake its solution. Market value is not really a part of 
the process but the final result. It includes in many oases a cap- 
italization of certain monopoly profits and the monopoly value thus 
created is set up as justifying the higher rates which have in fact 
created the monopoly value. 

193. Physical Valuation as the Basis of Rates^^ 

BY SAMUEL O. DUNN 

In recent years a new theory of the proper way to ascertain the 
reasonableness of rates has gained wide acceptance. Many believe 
that the railways of this country are overcapitalized. They think, 
therefore, that the return on their capitalization is not a criterion 
of the reasonableness of their rates. The sole true criterion, they 
believe, is a "fair return" on the "fair value" of the properties of 
the railways ; a "fair return" is the current rate of interest ; and 
therefore the government should make a valuation of the properties, 

^^ Adapted from The American Transportation Question, 84-95. Copy- 
right by D. Appleton & Co. (1912). 



RAILWAY REGULATION 383 

and in future so regulate rates as to restrict net earnings to the 
current rate of interest on this valuation. 

Many believe that large amounts of net earnings, that legally 
might have been paid out to the stockholders, have instead been 
invested in the properties. The properties also contain a large 
amount of so-called "unearned increment." It is argued that, as 
railways are public service corporations, their owners are not en- 
titled to receive a return on those parts of their value which have 
been created by the investm'ent of earnings or by increases in the 
value of real estate caused by the industrial development of the 
country. 

The owners and managers contend, on the other hand, that in 
any estimate that may be made of the value of the properties on 
which a return should be allowed to be earned, every factor enter- 
ing into their present value should be considered. The net earn- 
ings, they say, belong to the stockholders. They may either invest 
them or pay them out as dividends; and where they have chosen 
to invest them the value thereby added belongs to them. They 
also own the real estate used for railway purposes as absolutely — 
so long as it is used for railway purpose — as the farmer owns his 
farm; and therefore they have the samie right, it is said, to profit 
by increases in its value. 

From' a legal standpoint the spokesmen for the railways seem 
to have the better of the argument. The fifth and fourteenth 
amendments to the Federal Constitution prohibit the Nation and 
the States from taking private property for public use without due 
process of law and just co^mpensation. When the railway, in the 
exercise of the power of eminent domain, takes the farmer's land, 
these provisions are construed to mean that it must pay him for it 
— not what it cost him — but its reasonable market value at the time 
that it is taken. A similar construction of the same provisions as 
they apply to railways would require that rates should be so regu- 
lated as to enable the railways to earn a return on the value of their 
properties at the time that the rates are being regulated, however 
the value may have been created. For if the rates were so regulated 
as to disable the company from earning a return on any part of the 
value of its property this would be, in efifect, to take so much of 
its value. 

Any plan for valuation, other than present value is indefensible. 
Cost of reproduction is no exception. It costs on the average from 
one and one-third tO' three times as much to get land for railway 
as for other purposes. This is because its acquisition and use for 
railway purposes involve damage tO' adjacent property which must 



384 CURRENT ECONOMIC PROBLEMS 

be paid for, and because land that is directly in the path oi a com- 
ing railway attains a monopoly value. The Railroad Commission 
of Minnesota, in making its valuation of the railways of that state, 
held that the appraisal of railway land should be based on the 
value of adjacent land used for other purposes. 

But how, railway men ask, can what the farmer would have to 
pay for land properly be used as a factor in estimating what it 
would cost to reproduce the railway? Suppose that adjacent farm 
land were worth $100 an acre; that the valuation of an established 
railway were made on this basis; and that afterward there was 
built a new and competing line, to which the actual cost O'f land was 
$200 an acre. The competitive rates on competing railways must 
be the same. If the rates of the older railway were to^ be so fixed 
as to restrict it to a return on $100 an acre, the new railway would 
have to meet them and might thereby be deprived of the opportunity 
to earn a return on part of its actual investment. This would tend 
to discourage new railway construction. 

The Railroad Commission of Washington met a situation simi- 
lar to this when it made its valuation of the railways of that state. 
The Northern Pacific, many years ago, acquired land for extensive 
terminals on Puget Sound at a low price. The Harriman lines 
recently built to Puget Sound, and because of the increase in the 
value of land had to pay very much more for it. The two systems 
were competitors, and had to make the same co^mpetitive rates. To 
have based the valuation of the Northern Pacific's land on its orig- 
inal cost, or on its estimated value for other than railway purposes, 
might have prevented the Harriman lines from earning a fair re- 
turn on the actual cost O'f their land. The Commission, therefore, 
based the valuation of the land of both roads on its present esti- 
mated cost of acquisition for railway purposes. 

Another important point in estimating the cost oi reproducing 
the physical plants of railways is what deduction should be made 
for depreciation, and what addition should be made for apprecia- 
tion, in the value of their various parts. The moment a rail or tie 
is laid, or a signal tower or station is finished, it begins to deterior- 
ate, owing tO' use, and the ordinarily insidious, but often violent, 
ravages of the elements.. But while the depreciation is going on 
there is also appreciation going on. As soon as a new line is fin- 
ished maintenance forces are put to w^ork, if it is well managed, 
which limit the depreciation that takes place by making constant 
repairs and renewals. If a deduction from the cost of reproduction 
should be made because of depreciation, an addition to it should be 
made because of appreciation. 



RAILWAY REGULATION 385 

According to the widely accepted theory, as soon as an estimate 
of the cost of physical reproduction is finished, we should go ahead 
and so regulate rates on a road as to limit each carrier to the same 
return. But is such an estimate a valuation? Indubitably, other 
things being equal, a railway having a good physical plant is more 
valuable than one having a poor one. But, surely, the estimated 
cost of reproducing a railroad's plant is not the value of the plant ; 
and the value of the plant is not the value of the railroad. 

A railway through mountainous country might be more expen- 
sive to reproduce than one built through easy prairie country; but 
the latter's plant may be the more valuable, simply because it is the 
better machine for rendering transportation. 

Again, of two roads having equally good physical plants, that 
having the larger net earnings is plainly the more valuable. Now, 
net earnings do not depend solely on rates. They are the margin 
between gross earnings and operating expenses. Gross earnings 
depend not only on the rates charged, but on the nature and density 
of traffic. These, in turn, result largely from the energy and skill 
used by the traffic department of the railway in attracting popula- 
tion to its lines, teaching the farmers how tO' increase the produc- 
tivity of the soil, securing the opening of mines and the location of 
factories, and so adjusting rates as to enable producers in the terri- 
tory to compete successfully in the markets of the entire country 
and of the world against the producers in other sections and coun- 
tries. Whether operating expenses shall be high or low in propor- 
tion to gross earnings depends on the enterprise and skill used by 
the management in reducing the grades and eliminating the curva- 
ture in track, in enlarging termiinals, developing esprit de corps 
among officers and employees, increasing shop efficiency, augment- 
ing tonnage per car and per train load, and in a hundred other ele- 
ments of good management. A road whose traffic is large and 
whose operating expenses are relatively small obviously would have 
larger net earnings, and, therefore, be a more valuable property 
than a road on which the traffic is relatively small and the operating 
expenses relatively high, on any basis of rates whatever that might 
be applied on both. 

Large traffic and relatively low operating expenses are strong 
evidences of good management. If valuation were based entirely 
on the cost of physical reproduction, and the net earnings of each 
road could be, and were, limited to^ the same amount, the better 
managed roads would be deprived of the fruits of their good man- 
asrement. 



386 CURRENT ECONOMIC PROBLEMS 

As a matter of fact, such regulation probably would be entirely 
impracticable; for the competitive rates on different roads must be 
the same; and, owing to the differences in density of traffic and 
operating expenses, no two roads charging the same rates could 
be made to earn the same percentages on their valuations. 



194. The "Railway- Value" of Land"^ 

It is manifest that an attempt to estimate what would be the 
actual cost of acquiring the right of way if the railroad were not 
there is to indulge in mere speculation. The railroad has long been 
established; to it have been linked the activities of agriculture, in- 
dustry, and trade. Communities have long been dependent upon 
its service, and their growth and development have been conditioned 
upon the facilities it has provided. The uses of property in the 
communities which it serves are tO' a large degree determined by 
it. The values of property along its line largely depend upon its 
existence. It is an integral part of the communal life. The assump- 
tion of its non-existence, and at the same time that the values that 
rest upon it remain unchanged, is impossible and cannot be enter- 
tained. The conditions of ownership of the property and the 
amounts which would have to be paid in acquiring the right of way, 
supposing the railroad to be removed, are wholly beyond reach of 
any process of rational determination. The cost-of- rep reduction 
method is of service in ascertaining the present value of the plant, 
when it is reasonably appilied and when the cost of reproducing the 
property may be ascertained with a proper degree of certainty. But 
it does not justify the acceptance of results which depend upon mere 
conjecture. 

The question is whether, in detennining the fair present value 
of the property of the railroad company as a basis of its charges to 
the public, it is entitled to a valuation of its right of way not only 
in excess of the amount invested in it, but also in excess of the 
market value of contiguous and similarly situated property. For 
the purpose of making rates, is its land devoted tO' the public use 
to be treated (irrespective of improvements) not only as increasing 
in value by reason of the activities and general prosperity of the 
community, but as constantly outstripping in this increase all neigh- 
boring lands of like character, devoted tO' other uses? If rates laid 
by competent authority, state or national, are otherwise just and 

^^Adapted from the opinion of the court in Simpson v. Shepard, 33 Su- 
preme Court Reporter 761 (1913). This is the well-known "Minnesota Rate 
Case." 



RAILWAY REGULATION 387 

reasonable, are they to be held to be unconstitutional and void be- 
cause they do not permit a return upon an increment so calculated ? 

It is clear that in ascertaining the present value we are not limit- 
ed to the consideration of the amount of the actual investment. If 
that has been reckless or imjprovident, losses may be sustained 
which the community does not underwrite. As the company may 
not be protected in its actual investment, if the value of its property 
be plainly less, so the making of a just return for the use of the 
property involves the recognition of its fair value if it be more 
than its cost. The property is held in private ownership, and it is 
that property, and not the original cost of it, of which the owner 
may not be deprived without due process of law. But still it is 
property employed in a public calling, subject to governmental reg- 
ulation, and while, under the guise of such regulation, it may not 
be confiscated, it is equally true that there is attached to its use the 
condition that charges to the public shall not be unreasonable. And 
where the inquiry is as to the fair value of the property, in order 
to determine the reasonableness of the return allowed by the rate- 
making power, it is not admissible to attribute to the property 
owned by the carriers a speculative increment of value, over the 
amount invested in it and beyond the value of similar property 
owned by others, solely by reason of the fact that it is used in the 
public service. That would be to disregard the essential conditions 
O'f the public use, and to make the public use destructive of the 
public right. 

The increase sought for "railway value" in these cases is an 
increment over all outlays of the carrier and over the values of 
similar land in the vicinity. It is an increment which cannot be 
referred to any known criterion, but must rest on a mere expression 
of judgment which finds no proper test or standard in the transac- 
tions of the business world. 

Assuming that the company is entitled to a reasonable share in 
the general prosperity of the communities which it serves, and thus 
to attribute to its property an increase in value, still the increase so 
allowed, apart from any improvements it may make, cannot properly 
extend beyond the fair average of the normal market value of land 
in the vicinity having a similar character. Otherwise we enter the 
realm of mere conjecture. We therefore hold that it was error to 
base the estimates of value of the right of way, yards, and terminals 
upon the so-called ''railway value" of the property. The company 
would certainly have no ground of complaint if it were allowed a 
value for these lands equal to the fair average market value of sim- 
ilar land in the vicinity. 



388 CURRENT ECONOMIC PROBLEMS 

F. GOVERNMENT OWNERSHIP OF RAILROADS 
195. The Drift toward Government Ownership-* 

BY FRANK HAlGH DIXON 

We have reached a point in the regulation of railways where 
competition in rates to any great degree is hardly probable. Econ- 
omists have frequently demonstrated the undesirability of encour- 
aging competition between industries subject to the law of increasing 
returns, and particularly between railways which have such enor- 
mous fixed plants in relation to the business done. Regulation has 
been substituted for competition as a public safeguard. But this 
principle of regulation has now been carried so far that the rate- 
fixing power has virtually been taken out of the hands of the rail- 
ways and transferred to the Interstate Commerce Commission. 
Rates are rapidly becoming hardened at the maximum point fixed 
by the Commission, and competition, at least among parallel rail- 
ways, has largely disappeared. 

But the statement is frequently made that even though compe- 
tition in rates is ended, railways should be prevented from agree- 
ments with one another in order that the public may enjoy the 
benefits of competitive service. But what, it may be asked, is an 
improvement in service but a reduction in rates ? And why may not 
the practice of rebating be pursued in this manner even more suc- 
cessfully than by the more crude method of returning a part of the 
freight money? 

In fact, in the knotty problems with which the Commission has 
wrestled, such as elevator allowances, transit privileges, the absorp- 
tion of switching charges, the spotting of cars, there is a clear rec- 
ognition of the fact that these services are fundamentally problems 
of rates, that they must be adjusted by the regulating body, that 
they must be uniform and non-discriminatory, and that they must 
be filed as rates are filed for public inspection and criticism. 

It is the pressure of competitive service that has driven the 
railroads into the impossible position which some of them now 
occupy where they are absorbing terminal services of such an ex- 
pensive character that they are left with scarcely enough of the total 
rate to pay operating expenses; where the industrial plants are 
receiving from the railways a portion of the freight rate for the 
privilege of hauling their own cars about their own yards, with 
their own locomotives. Free storage, free loading and unloading, 

^* Adapted from "The Economic Significance of Interlocking Directorates 
in Railway Finance," in the Journal of Political Economy, XXII, 952-954 
(1914). 



RAILWAY REGULATION 389 

free collection and delivery, refrigerator service, milling in transit, 
prompt and abundant provision of cars, preferred services in the 
matter of speed ; all of these practices and many more have resulted 
in discriminations and have depleted the revenues of the roads. 
Reduced to their lowest terms these are all questions of rates, if 
not of rebates. From this tangle of inconsistent and unprofitable 
relations into which the railways have been forced by the pressure 
of competition, they can be extricated only with the aid of the Inter- 
state Commerce Commission. 

There seems to me to be but one outcome. Before long the Com- 
mission will be compelled to regulate service quite as rigidly as it 
does rates. All the power necessary to do so is already theirs by 
statute, and they have already in many individual cases made sig- 
nificant rulings that involve problems of service. 

When that day comes, and it is not far in the future, when the 
Commission assumes as complete control of service as it has already 
done of rates, it will then be of little or no public concern whether 
parallel and competing railways are or are not interlocked. That 
every evil of a monopoly character would then be done away with 
for good and all I do not assert. That would be placing too low 
an estimate on the ingenuity of the financial juggler. But the public 
advantages of co-operation on the part of the large railway systems 
so decidedly outweigh any remote disadvantages that there seems 
no justification for a prevention of interlocking relationships. Such 
close co-operation will work, not to the restraining of trade unrea- 
sonably, but rather to its liberation, for it will permit the execution 
of co-operative plans for relief in many situations that are now 
wastefully handled. It will permit the application of principles of 
scientific economic railway operation to the railway system as a 
whole. 

It is a curious myopia that persists among the American people 
and demands competition between these great industries to the cer- 
tain burdening of them ultimately with its inevitable costs. Yet with 
this prejudice against combination lodged in the breasts of the peo- 
ple, the movement of events as expressed in legislation has been 
steadily away from reliance upon the efficacy of competition and in 
the direction of more and more rigid regulation. That it will stop 
short of government ownership does not seem at all clear. 

196. Government Ownership as a Refuge^^ 

President W. W. Finley,'^ in his thoughtful and suggestive ad- 
dress before the New York Traffic Club, made one remark which 

^^Adapted from an editorial in the Railway World, March 13, 1908. 
""The late president of the Southern Railway. 



390 CURRENT ECONOMIC PROBLEMS 

we earnestly commend to the attention of railway stockholders and 
officials. After showing that the growth of the transportation sys- 
tem of the country must further its continued economic development, 
and that the present tendencies of public regulation, if allowed to 
go on, would be to cripple private enterprise, he said : "I do not 
believe that the sentiment of a majority of the people of the United 
States is favorable to governmental ownership, but I do believe that 
if some of the more extreme legislation already enacted is supple- 
mented along the lines now proposed, the ultimate result must be 
to break down the system of private ownership." 

Government ownership of railroads, long regarded as the dream 
of the impractical radical, is rapidly looming into view as an im- 
pending change far-reaching and fundamental in the structure of 
our economic life. Government ownership of railroads is the inev- 
itable consequence of the present system of regulation which is 
developing into the scheme of irresponsible public management by 
boards and commissions which will "practically leave little to the 
owners of the property but the privilege of providing the capital 
necessary for construction and operation, and liability for heavy 
damages and attorney's fees in every case of failure to maintain 
the required standard of service, and for penalties in amounts which 
might easily absorb a very large proportion of the gross earnings of 
a company rendering the most efficient service in its power." 

We seriously question whether public ownership would not be 
better than the system of public regulation so graphically described 
by President Finley. True, it would seriously impair the efficiency 
of our transportation system. It would also make the railway pol- 
icies of the country a matter of serious controversy. But, with its 
disadvantages, it would be an improvement on the present system 
of regulation. 

There is, however, another side to the picture. Under govern- 
ment ownership, the stockholders and creditors of the railways 
would exchange their holdings for government bonds, and they 
would be sufficiently influential to protect themselves from any 
serious injustice in the terms of exchange. They would then turn 
over the management of the railroads to the government officials, 
freeing their long-endangered capital for entrance into safer lines 
of employment and leaving the country to struggle with a set of 
"problems" far more serious and difficult than even the tariff and 
currency questions. 

Why should the owners of American railway companies resist 
the trend toward government ownership ? They will suffer no dam- 
age in the transfer. The courts can be relied on to protect their 
rights. They will be freed from further worry and annoyance. To 



RAILWAY REGULATION 391 

them at least, if not to the shipper, the change will come like a cool 
and refreshing shower at the close of a hot and sultry day. We 
recommend to railway owners the careful consideration of this mat- 
ter. We would even go so far as to suggest that they become active 
in support of the public-ownership propaganda, and meanwhile that 
they refrain from further investments in railway development. Even 
if their advocacy of the strange doctrines of socialism does not suc- 
ceed, their refusal to invest further in a business which they are not 
allowed to control may furnish a needed object-lesson to the advo- 
cates of railway regulation. 



197. The Economies of Government Ownership-^ 

BY Frank parsons 

Public ownership aims at service rather than profit. It there- 
fore not only tends to a lower rate level than private ownership, 
gravitating to the greatest service without deficit, but it tends to 
lower that level. Thus public ownership favors low rates in a double 
way, first, by tending to bring rates down to cost, and second, by 
lowering cost. 

Some of the reasons for the superior economy of public owner- 
ship are as follows : 

1. The pubHc plant has no lobby expenses or corruption funds 
to raise, as many of the private monopolies have. 

2. It has no rebates or commissions or other secret conces- 
sions to favored customers to provide for. 

3. It has no dividends on watered stock to pay. 

4. It has no overgrown salaries or monopolistic profits to pro- 
vide for. The principal salaries are likely to be smaller under pub- 
lic ownership and the wages of ordinary labor somewhat higher than 
under private ownership. 

5. Litigation expenses and lawyer's fees are likely to be less 
under public ownership than with private systems. 

6. The public plant generally is able to save on interest charges. 
The public credit is better than even that of very strong private 
companies, the government being able to borrow often at 3 per cent 
or less when a private company has to pay from 4 to 6 per cent in 
the same locality. The government also saves on insurance, insur- 
ance simply being intended to diffuse loss, the government acting 
as its own insurer — diffusing the loss without paying the commis- 
sion or agents' fees. 

""Adapted from Report of the Industrial Commission on Transportation, 
IX, 147 (1901). 



392 CURRENT ECONOMIC PROBLEMS 

7. Public ownership gains through superior co-ordination of 
industry, which is impossible under private ownership except through 
incurring the dangers of a concentration of wealth and power in 
the hands of a few, the evils of which would be likely to outweigh 
the benefits of co-ordination. 

8. The public also gains through the civic interests of the peo- 
ple, which increases and facilitates the business. The people patron- 
ize their own institutions to a far greater extent than they patronize 
private institutions. A man does not hesitate to increase the income 
of a public plant; his civic pride leads him to favor its prosperity; 
it is his plant; he is a partner in the concern; but the majority of 
men do not enjoy increasing the profits of a private monopoly. 

9. In the next place the public plant escapes the costs and bur- 
dens of costly strikes and lockouts. 

10. Public ownership saves the cost of numerous regulative 
commissions and investigations into the secrets of private monopoly. 
Everything is open and public, and there is no necessity of those 
tremendous investigations. It also saves in the cost of legislation, 
since the time and attention of our legislators are very largely given 
to these great private monopolies, making laws they want and mak- 
ing laws to control them. 

11. The superior diffusion of wealth and elevation of labor 
resulting from a normal public system tend to diminish the extent 
and the cost of the criminal and defective and unfortunate classes ; 
as in New Zealand, where they have practically wiped out the un- 
employed agitation through the administration of public utilities. 

12.. The elimination of the antagonism between the owners of 
vast industries and the public carries with it all the useless activities 
and wastes of conflict which result from that antagonism. 

198. The Inexpediency o£ Government Ownership^* 

BY SAMUElv O. DUNN 

Do the railway and the general political conditions existing here, 
and the experience of other democratic nations, indicate that the 
adoption of government ownership of railways here would be, on 
the whole, beneficial to the public? The answer to this question 
must be set forth here in summary manner. It is in brief as fol- 
lows : 

I. The railways of the United States are, considering all per- 
tinent conditions, as economically managed as any in the world ; and 

^^Adapted from Government Oumership of Railways, 376-378. Copyright 
by D. Appleton & Co. (1913). 



RAILWAY REGULATION 393 

it is probable that under government management there would be an 
increase in the total expense incurred in rendering railway service. 

2. Under private management, the development of the railways 
of the country has gone forward at a rate which, until recent years, 
has not been equaled in any country. The capacity of the railway 
trackage and equipment provided in proportion to both area and 
population is not surpassed in any other country; and while there 
are some shortages of facilities for handling freight traffic, these 
are not peculiar to this country. Similar shortages occur on some 
of the leading private and state railways of the world. 

3. The quality of the freight and passenger service rendered 
here is in most respects equal or superior to the quality of that ren- 
dered by railways in other countries under conditions at all com- 
parable. 

4. The service in this country is, however, very deficient as 
compared with that of most other countries in respect to the ex- 
tremely important element of safety. But the evidence indicates 
that this is due rather to local conditions than to private manage- 
ment, and that the situation in this regard probably would not be 
improved under government management. 

5. Passenger rates in this country probably are no higher than 
in most countries for similar services ; but the average rate per pas- 
senger per mile is much higher than it is on most state railways; 
and state railways usually make lower passenger rates than private 
railways. 

6. The freight rates of the railways of this country have been, 
and are yet, based largely on what the traffic will bear. In other 
countries under public management, the domestic freight rates are 
usually based rigidly on distance. The rate-making policy followed 
in this country is well adapted to promoting the fullest development 
of industry and commerce, but it has led to many unfair and ex- 
tremely harmful discriminations. Public regulation has greatly re- 
duced the number of these unfair discriminations, and doubtless 
can reduce it still further; but, in the nature of things, unfair dis- 
crimination seems more likely to occur under private management 
than under state management. 

7. The average freight rate per ton mile of the railways of this 
country is the lowest in the world, excepting, apparently, that of the 
state railways of Japan ; and relatively to the conditions under which 
they are charged freight rates here are probably the lowest in the 
world. Private railways generally tend to make lower freight rates 
than state railways ; and low freight rates are of more benefit to the 
public than low passenger rates. 



394 CURRENT ECONOMIC PROBLEMS 

8. While in many countries state railways cause financial losses 
to the public, in the United States the public derives large sums from 
the railways in the form of taxes. Furthermore, the amount of taxes 
collected from them is rapidly increasing. 

9. The condition of the labor employed on the railways of this 
country relatively is as good as that of the labor employed on the 
railways of any other country ; and it could not be substantially im- 
proved without imposing an additional burden of rates on travelers 
or shippers, or both, or an additional burden of taxes on the general 
public. In either case the greater part of the added burden would 
fall on the middle and working classes. 

10. In view of the experience of many other countries with state 
management of railways, and of the conditions existing in our own 
country, it would seem that state management here would have a 
tendency to corrupt rather than to purify politics. 

Clearly the preponderance of the evidence does not indicate that, 
under existing conditions at least, the adoption of government 
ownership in the United States would be beneficial to the public. 



VIII 
THE PROBLEM OF CAPITALISTIC MONOPOLY 

Corners, rings, patents of monopoly, pools, cartels, trusts, holding com- 
panies, "Gary dinners," interlocking directorates, "communities of interest," 
"gentlemen's agreements," closed shops, codes of "professional ethics" — such 
terms serve to emphasize the venerable age, the cosmopolitan character, and 
the motley form of the monopoly problem. Tt is as old as industrial society 
and as new as the latest court decision. Other ages have met this "hydra- 
headed monster" ; but they have possessed neither a collection as varied as 
ours nor such a prize specimen as our "capitalistic monopoly." This for us is 
the real monopoly. The "corner" is an aspect of speculation. Copyrights and 
patents exist by grace of the state. The "natural" monopolies of such things 
as gas, water, and telephone service, and even of forest lands and iron de- 
posits, present much the same aspects and give rise to much the same prob- 
lems as the railroads. But it is otherwise with "capitalistic monopoly," a 
phenomenon of Modern Industrialism, an offshoot of the machine system. 

To act with wisdom we must first determine whether so "unnatural" and 
so obvious a thing is "inevitable." To do this we must carefully consider the 
"conditions of monopolization." But the institution is new ; its life history 
does not as yet stand revealed in its entirety; our experience is limited; and 
our view is too close for perspective. Our answer is, therefore, hesitating. 
However, there seem to be three "groups of forces" which have conspired to 
produce this phenomenon. First, the machine process must be charged with 
partial responsibility. It has made large-scale production possible; it has 
caused industries of tremendous size to operate in a "stage of increasing re- 
turns"; it has developed in the corporation an impersonal form of business 
organization ; it has concentrated in the hands of the pecuniarily efficient few 
huge aggregates of wealth ; and in many lines it has reduced the number re- 
sponsible for production to a small handful who can know each other per- 
sonally and among whom a group spirit can develop. Even if monopoly and 
large-scale production are distinct economic phenomena, the problem of "cap- 
italistic monopoly" arises only where wealth is concentrated. Second, the high 
rate of development in the industrial system cannot completely escape re- 
sponsibility. New technique is often forced into use before old technique has 
paid for itself. The development of demand in our constantly expanding 
market has had the most vacillating course. Under competition and inde- 
pendent action of rival producers the market has experienced alternate dearth 
and glut. These uncertainties, seriously ■ threatening profits, and even sol- 
vency, have been greatly increased by violent and unpredictable rhythm of 
the business cycle. Competing producers have thus been compelled "to get 
together." Third, "artificial" conditions have contributed their influence to 
the transformation. The "concentration of cash" and the "restriction of 
credit," the fickleness and special favors of the tariff, and the clever "manip- 
ulation" of railway rates have contributed to the general result. Were we 
able properly to impute responsibility to these various "forces," we should 
perhaps know what to do. Were responsibility entirely upon those last men- 
tioned, the monopoly problem would resolve itself into such problems as the 
money trust, the tariff, and railroad rates. Were sole responsibility upon the 
second, our question would become a mere aspect of the problem of the 
economic cycle. Only the first directly promises an independent problem. Yet, 
were the causes wholly artificial, a removal of them would not solve the 
problem ; their influence has been too organic and too wide-reaching for that. 

395 



396 CURRENT ECONOMIC PROBLEMS . 

There is a monopoly problem, involving these various factors, yet far more 
comprehensive than a mere aggregation of them. 

Public attention seems to be directed very largely to some few minor 
aspects of this larger problem. It concerns itself with monopoly price, the 
use of "unfair competitive methods," and the "power" of big business in 
politics. Only vaguely is it seen that the institution of monopoly is intimately 
associated with the stratification of society, the concentration of wealth, the 
distribution of income, and other aspects of social development. Very little 
attention is given to the institutional aspects of monopoly : its influence in the 
determination of the kind of a society we would like to realize ; its influence 
upon the ethics underlying distribution ; the effect it is likely to have upon the 
attempt of class- and group-conscious labor to incorporate their interests 
into the institutional system ; its effect upon the distribution of opportunity, 
and similar questions. But all these are important aspects of the larger 
problem. 

In our partial attempt to control monopoly we have used very largely the 
agencies of the state. The law has given the for'^n of monopoly organization a 
merry chase. Perhaps "the complete merger," now the popular style, is a 
permanent garb rather than a temporary disguise. In that event, our atten- 
tions may have been justified in putting the problem in terms in which it can 
be reached. The application of the Sherman law has doubtless given us the 
beginning of a "standard of reasonableness" in terms of which the conduct of 
large business units can be judged, despite the obvious fact that trusts have 
waxed fat on the invigorating tonic of dissolution. By more sharply defining 
"unfair competition," the Clayton bill should raise the "plane" of industrial 
rivalry. The promises of the Trade Commission are vague and indefinite as 
yet, though they bristle with possibilities. 

But as yet the real problem of monopoly has not been solved. What 
shall we do about it all? It is possible that monopoly is a mere "passing 
phase" of a larger industrial movement, born of competition, and with a short 
span of life. It may be that legislation and administration can achieve a 
"restored" regime of unimpeded competition, even if such a regime never 
existed. Or it may be that monopoly is "inevitable," and that all we can do 
is to regulate it before it regulates us. 

What we most need is a far-sighted vision and patience carefully to cal- 
culate anticipated gains and losses. That "competition is wasteful" does not 
make out a case for regulated monopoly. The costs of regulation must be 
balanced against the costs of waste. But regulation once started is likely 
to be carried to unforeseen and perhaps unwarranted lengths, both in the mi- 
nuteness of its control and in the number of industries affected. These costs 
incident to this extension must find a place in our calculation. Our judgment, 
too, must not be too immediate. Our capacity for development may be quite 
differently utilized under regimes of monopoly and competition. We know, 
for example, that an incentive to monopoly has been a desire to escape the 
rigors of changing technique. Is it not, therefore, more than possible that 
monopolistic industries will introduce technical improvements much less rap- 
idly than competitive industries? Is it not further possible that new tech- 
nique may not succeed in getting itself invented? The question must be 
settled by a long-time calculation of relative gains and sacrifices. But this is 
not the whole, but only the economic aspect of the larger problem of monopoly. 
It must be subordinated to the more general question, Are the general social 
tendencies inherent in regulated monopoly more compatible with our realiz- 
able social ideals than those implicit in a system of competition? 

This is the beginning of the problem. If our decision favors a restora- 
tion of a competitive society, we are face to face with the problem of ways and 
means. If we decide in favor of regulated monopoly, we must determine, 
perhaps as we go, the extent to which monopoly shall be recognized, the 
means and extent of regulation, and the "good of it all." The problem awaits 
a progressive solution. 



CAPITALISTIC MONOPOLY 397 

A. IS MONOPOLY INEVITABLE? 
igg. The Perennial Problem of Monopoly 

a) An Barly Corner in Grain^ 

And Joseph went out from the presence of Pharaoh, and went 
throughout all the land of Egypt. And in the seven plenteous years 
the earth brought forth by handfuls. And he gathered up all the 
food of the seven years which were in the land of Egypt, and laid 
up the food in the cities : the food of the field, which was round 
about every city, laid he up in the same. And Joseph laid up grain 
as the sand of the sea, very much, until he left off numbering; for 
it was without number. 

And the seven years of plenty, that was in the land of Egypt, 
came to an end. And the seven years of famine began to come, 
according as Joseph had said : and there was famine in all lands ; 
but in all the land of Egypt there was bread. And when all the land 
of Egypt was famished, the people cried to Pharaoh for bread : and 
Pharaoh said unto all the Egyptians, Go unto Joseph : what he saith 
unto you, do. And the famine was over all the face of the earth: 
and Joseph opened all the storehouses, and sold unto the Egyptians ; 
and the famine was sore in the land of Egypt. And all countries 
came unto Egypt to Joseph to buy grain, because the famine was sore 
in all the earth. 

And there was no bread in all the land ; for the famine was very 
sore, so that the land of Egypt and the land of Canaan fainted by 
reason of the famine. And Joseph gathered up all the money that 
was found in the land of Egypt, and in the land of Canaan, for the 
grain which they bought; and Joseph brought the money into 
Pharaoh's house. And when the money was all spent in the land 
of Egypt, and in the land of Canaan, all the Egyptians came unto 
Joseph, and said. Give us bread: for why should we die in thy 
presence? for our money faileth. And Joseph said, Give your 
cattle ; and I will give you for your cattle, if money fail. And they 
brought their cattle unto Joseph; and Joseph gave them bread in 
exchange for the horses, and for the flocks, and for the herds, and 
for the asses : and he fed them with bread in exchange for all their 
cattle for that year. And when the year was ended they came unto 
him the second year, and said unto him, We will not hide from my 
lord, how that our money is all spent; and the herds of cattle are 
my lord's ; there is naught left in the sight of my lord, but our bodies 
and our lands : wherefore should we die before thine eyes, both we 

^From Gen. 41:46-49, 53-57; 47:13-22 (800 B.C.). 



398 CURRENT ECONOMIC PROBLEMS 

and our land ? buy us and our land for bread, and we and our land 
will be servants unto Pharaoh : and give us seed, that we may live, 
and not die, and that the land be not desolate. 

So Joseph bought all the land of Egypt for Pharaoh; for the 
Egyptians sold every man his field, because the famine was sore 
upon them : and the land became Pharaoh's. And as for the people 
he removed them to the cities from one end of the border of Egypt 
even to the other end thereof. Only the land of the priests bought 
he not. 

h) A Vindication of Philosophy'^ 

BY ARISTOTIvE; 

It would be well also to collect the scattered stories of the ways 
in which individuals have succeeded in amassing a fortune; for 
all this is useful to persons who value the art of making money. 
There is the anecdote of Thales the Milesian and his financial de- 
vice, which involves a principle of universal application, but is at- 
tributed to him on account of his reputation for wisdom. He was 
reproached for his poverty, which was supposed to show that 
philosophy was of no use. According to the story, he knew by his 
skill in the stars while it was yet winter, that there would be a great . 
harvest of olives in the coming year; so, having a little money, he 
gave deposits for the use of all the olive presses in Chios and 
Miletus, which he hired at a low price because no one bid against 
him. When the harvest-time came, and many wanted them all at 
once and of a sudden, he let them out at any rate which he pleased, 
and made a quantity of money. Thus he showed the world that 
philosophers can easily be rich if they like, but that their ambition 
is of another sott. He is supposed to have given a striking proof of 
his wisdom, but, as I was saying, his device for getting money is of 
universal application, and is nothing but the creation of a monopoly. 
It is an art often practiced by cities when they are in want of money; 
they make a monopoly of provisions. 

c) An Early Use of Class Price^ 
BY JOHN gowEr 

Wouldst thou have closer knowledge of Trick the Taverner? 
Thou shalt know him by his piment, his claree, and his new ypocras, 
that help to fatten his purse when our city dames come tripping at 

^From The Politics, I, ii : 7-10 (357 B.C.) ; translated by B. Jowett. 
'Adapted from Mir our de I'Omme, 11. 421 ff. (1376-1379). Translation in 
Coulton, A Mediaeval Garner, 577-578. 



CAPITALISTIC MONOPOLY 399 

dawn to his tavern as readily as to minister or to market. Then 
doth Trick make good profit; for be sure that they will try every 
vintage in turn, so it be not mere vinegar. Then will Trick per- 
suade them that they may have Vernage, Greek wine, and Malvesie 
if they will but wait; the better to cajole them of their money, he 
will tell them of divers sorts — wines of Crete, Ribole, and Rou- 
mania, of Provence, and Monterosso ; so he boasteth to sell Riviera 
and Muscadel from his cellar, but he hath not a third part of all 
these ; he nameth them but for fashion's sake, that he may the bet- 
ter entice these dames to drink. Trust me, he will draw them ten 
sorts of wine from one barrel, when once he can get them seated 
in his chairs. Better than any master of magic Trick knoweth 
all the arts of the wine-trade ; all its subtleties and its guile. He is 
crafty to counterfeit Rhine wine with the French vintage ; nay, even 
such as never grew but by Thames shore, even such will he brisk up 
and disguise, and baptize it for good Rhenish in the pitcher: so 
quantily can he dissemble, that no man is so cautious but Trick will 
trick him in the end. 

d) In the Merrie England of Queen Bess^ 

BY DAVID HUME 

The active reign of Elizabeth had enabled many persons to dis- 
tinguish themselves in civil or military employments ; and the queen, 
who was not able, from her revenue, to give them any rewards pro- 
portional to their services, made extreme use of an expedient em- 
ployed by her predecessor. She granted her servants and cour- 
tiers patents for monopolies, and these patents they sold to others, 
who were thereby enabled to raise commodities to what price they 
pleased, and who put invincible restraints upon all commerce, in- 
dustry, and emulation in the arts. It is astonishing to consider the 
number and importance of those commodities which were thus as- 
signed over to patentees. Currants, salt, iron, powder, cards, calf- 
skins, fells, pouldavies, ox shin-bones, train-oil, lists of cloth, pot- 
ashes, aniseeds, vinegar, sea-coals, steel, aqua-vitae, brushes, pots, 
bottles, saltpetre, lead, accidences, oil, calamine-stone, oil of blubber, 
glasses, paper, starch, tin, sulphur, new drapery, pilchards ; trans- 
portation of iron ordnance, of beer, of leather ; importation of Span- 
ish wool, of Irish yarn. These are but a part of the commodities 
which had been appropriated by monopolists. When this list was 
read in the House, a member cried, "Is not bread in the number?" 
"Bread!" said everyone, with astonishment. "Yes, I assure you," 

''Adapted from The History of England, IV, chap, xliv (1759). 



400 CURRENT ECONOMIC PROBLEMS 

replied he, "if affairs go on at this rate, we shall have bread reduced 
to a monopoly before next Parliament." These monopolists were so 
exorbitant in their demands that in some places they raised the price 
of salt from sixteen pence a bushel to fourteen or fifteen shillings. 
Such high profits naturally begat intruders upon their commerce; 
and, in order to secure themselves against encroachments, the pat- 
entees were armed with high and arbitrary powers from the coun- 
cil, by which they were enabled to exact money from such as they 
thought proper to accuse of interfering with their patent. 

200. The Perennial Protest against Monopoly 

a) A Proverb about Corners^ 

The liberal soul shall be made fat ; 
And he that watereth shall be watered also himself. 
He that withholdeth grain, the people shall curse him; 
But blessings shall be upon the head of him that selleth it. 

b) The Ethics of Monopoly^ 

BY MARTIN IvUTHE;r 

There are some who buy up altogether the goods or wares of a 
certain kind in a city or country, so that they alone have such goods 
in their power, and then fix prices, raise and sell as dear as they 
will or can. The rule is false and unchristian that anyone sell his 
goods as dear as he will or can ; more abominable still is it that any- 
one should buy up the goods with this intent. Which same, more- 
over, imperial and common law forbids and calls monopoly; that is, 
selfish purchases which are not to be suffered in the land and the 
city, and princes and rulers should check and punish it if they wish 
to fulfil their duty. For such merchants act just as if the creatures 
and goods of God were created and given for them alone, and as 
though they might take them from others and dispose of them at 
their fancy. 

c) The Pests of Monopoly'^ 

BY SIR JOHN CULPi;PPKR 

These, like the frogs of Egypt, have gotten possession of our 
dwellings, and we have scarcely a room free from them. They sip 
in our cup ; they dip in our dish ; they sit by our fire ; we find them 

^Prov. II : 25-26 (350 B.C.). 

"Adapted from the address on "Trade and Usury," printed in the Open 
Court, XI, 27; translated by W, H. Carruth (1524). 

''Quoted in Hirst, Monopolies, Trusts, and Kartells, 20. 



CAPITALISTIC MONOPOLY 401 

in the dye-vat, washing-bowl, and powdering-tub. They share with 
the butler in his box ; they have marked and sealed us from head to 
foot ; they will not bate us a pin. 

d) The Inexpediency of Monopoly^ 

BY ADAM SMITH 

Though some exclusive privileges arise from nature, they are 
generally the creatures of the civil law. Such are monopolies and 
all privileges of corporations, which, though they might once be 
conducive to the interest of the country, are now prejudicial to it. 
The riches of the country consist in the plenty and cheapness of pro- 
visions, but their effect is to make everything dear. When a num- 
ber of butchers have the sole privilege of selling meat, they may 
agree to make the price what they please, and we must buy from 
them whether it be good or bad. Even this privilege is not of ad- 
vantage to the butchers themselves, because the other trades are also 
formed into corporations, and if they sell beef dear they must buy 
bread dear. But the great loss is to the public, to whom all things 
are rendered less comeatable, and all sorts of work worse done; 
towns are not well inhabited, and the suburbs are increased. 

e) Monopoly Indefensible^ 

A private monopoly is indefensible and intolerable. We there- 
fore favor the vigorous enforcement of the criminal as well as the 
civil law against trusts and trust officials and demand the enactment 
of such additional legislation as may be necessary to make it impos- 
sible for a private monopoly to exist in the United States. 

201. Monopoly, the Result of Natural Growth" 

BY GEORGE GUNTON 

Many people talk about trusts as if they were a sudden creation, 
the product of a conspiracy against the public. Nothing could be 
farther from the truth than this view. The history of trusts is 

^Adapted from Lectures on histice, Police, Revenue and Arms, 129-130; 
edited by Edwin Cannan (1763). 

*From the national platform of the Democratic party, adopted at Balti- 
more, July 3, 1912. 

"Adapted from Trusts and the Public, 32-34- Copyright by D. Appleton 
& Co. (1899). 



402 CURRENT ECONOMIC PROBLEMS 

simply the history of the continuous and almost imperceptible tend- 
ency in progressive society toward a greater centralization of cap- 
ital which the most highly developed labor-saving methods of pro- 
duction make necessary. The impeachment of trusts as economic 
institutions is therefore the impeachment of the concentration of 
capital, without which, it is needless to say, our great railroad, tele- 
graph, and factory systems would have been impossible. Very few 
of the industries which use the most approved methods and have 
contributed most to cheapening the multitude of products can now 
be conducted with a capital of less than a million dollars; many of 
them require tens and even hundreds of millions. A hundred or 
even fifty years ago, a millionaire might have been regarded with 
as much apprehension as is a hundred-millionaire today; indeed, he 
would have sustained about the same relation tO' the productive 
needs and methods of the community. The truth is that in this 
case, as in the growth of all social institutions, the new form came 
because it was necessary. The small English water-wheel factory 
on the river bank, in the eighteenth century, came because the iso- 
lated hand-loom and spinning-wheel did not permit the utilization of 
the most economic methods after the spinning- jenny and spinning- 
frame were invented. The steam>-driven factory in thickly popu- 
lated centers came in the first quarter of the nineteenth century 
because the water-wheel shops were incapable of employing the best 
methods after the invention of steam and the power-loom had been 
completed. If these had not been capable of lessening the cost of 
production and so rendering a general benefit to the community, 
they could not have succeeded, as there would have been no demand 
for their products. So, again, by the middle of the century, when 
machinery had been still further improved, partnership organization 
of industry became necessar}^ because single individuals were not 
rich enough to furnish plants sufficiently large to employ profitably 
the most improved methods. 

With the cheapening of products and the increased. consumption 
which followed the use of these successive improvements, and the 
consequent social advance of the community, a revolution in the 
methods of distribution and international communication became 
necessary. Inventions multiplied, which so enlarged the industrial 
world as to render corporations necessary in order tO' obtain the 
best economic results. Modern trusts are but a single step farther 
in the same direction. They are simply the organization of corpor- 
ations in the same way that corporations were the organization oi 
individual capitalists. 



CAPITALISTIC MONOPOLY 403 

Trusts, instead of being sudden monopolistic creations that have 
been sprung on the, community by a few designing conspirators, are 
but the last link in an industrial chain more than a century long; 
they are no more revolutionary than any one of the previous links, 
and less so than some of the earlier ones. Each one of these links 
in the great chain of industrial evolution cam-e and stayed only be- 
cause it was more profita:ble than its predecessors to those who em- 
ployed it, lessened the cost oi production, and served the community 
more cheaply. Had it not done this, it could not have sustained 
itself in competition with the old methods. 

202. Monopoly, the Result of Artificial Conditions'^ 

BY WOODROW WII.SON 

Gentlemen say, they have been saying for a long time, that trusts 
are inevitable. They say that the particular kind of combinations 
that are now controlling our economic development came into exist- 
ence naturally and were inevitable ; and that, therefore, we have to 
accept them as unavoidable and administer our development through 
themi. They take the analogy of the railways. The railways were 
clearly inevitable if we were to* have transportation, but railways 
after they are once built stay put. You can't transfer a railroad at 
convenience ; and you can't shut up one part of it and work another 
part. It is in the nature of what economists, those tedious persons, 
call natural monopolies ; simply because the circumstances of their 
use are so stiff that you can't alter them. 

I admit the popularity of the theory that the trusts have come 
about through the natural development of business conditions in 
the United States, and that it is a mistake to try to oppose the pro- 
cesses by which they have been built up', because those processes 
belong to the very nature of business in our time, and that therefore 
the only thing we can do is to accept them as inevitable arrange- 
ments and make the best out of it that we can by regulation. 

I answer, nevertheless, that this attitude rests upon a confusion 
of thought. Big business is no doubt to a large extent necessary 
and natural. The development of business is inevitable, and, let 
me add, is probably desirable. But that is a very different matter 
from the development of trusts, because the trusts have not grown. 
They have been artificially created ; they have been put together, 
not by natural processes, but by the will, the deliberate planning 
will, of men who were more powerful than their neighbors in the 

"Adapted from The New Freedom, 163-169. Copyright by Doubleday, 
Page & Co. (1912). 



404 CURRENT ECONOMIC PROBLEMS 

business world, and who wished to make their power secure against 
competitioin. The trusts do not belong tO' the period of infant in- 
dustries. They are not the products of the time, that old laborious 
time, when the great continent we live on was undeveloped, the 
young nation struggling to find itself and get upon its feet amidst 
older and more experienced comipetitors. They belong tO' a very 
recent and very sophisticated age, when men knew what they wanted 
and knew how to get it by the favor of the government. 

Did you ever look into the way a trust was made? It is very 
natural, in one sense, in the same sense in which human greed is 
natural. If I haven't efficiency enough to beat my rivals, then the 
thing I am inclined to do is to get together with my rivals and say : 
"Don't let's cut each other's throats; let's combine and determine 
prices for ourselves ; determine the output, and thereby determine 
the prices ; and dominate and control the market." That is very 
natural. That has been done ever since f reebooting was established. 
That has been done ever since power was used to establish control. 
The reason that the masters of combination have sought to shut 
out competition is that the basis of control under competition is 
brains and efficiency. I admit that any large corporation built up 
by the legitimate processes of business, by economy, by efficiency, 
is natural ; and I am not afraid of it, no matter how big it grows. 
It can stay big only by doing its work more thoroughly than any- 
body else. And there is a point of bigness where you pass the limit 
of efficiency and get into the region of clumsiness and unwieldiness. 
You can make your combine so extensive that you' can't digest it 
into a single system, ; you" can get so many parts that you can't as- 
semble them as you would an effective piece of machinery. The 
point O'f efficiency is overstepped in the natural process of develop- 
ment oftentimes, and it has been overstepped many times in the 
artificial and deliberate formation of trusts. 

A trust is formed in this way: a few gentlemen ''promote" it — 
that is to say, they get it up, being given enormous fees for their 
kindness, which fees are loaded on to the undertaking in the form 
of securities of one kind or another. The argument of the pro- 
moters is, not that every one who comes into the combination can 
carry on his business more efficiently than he did before; the argu- 
ment is : we will assign to you as your share in the pool twice, three 
times, four times, or five times what you could have sold your bus- 
iness for to an individual competitor who would have to run it on 
an economic and competitive basis. We can afford to buy it at 
such a figure because we are shutting out competition. 



CAPITALISTIC MONOPOLY 405 

Talk of that as sound business? Talk of that as inevitable? It 
is based upon nothing except power. It is not based upon efficiency. 
It is no wonder that the big trusts are not prospering in proportion 
to such competitors as they still have in such parts of their business 
as competitors have access to ; they are prospering freely only in 
those fields to which competition has no access. Read the statistics 
of the Steel Trust, if you don't believe it. Read the statistics of 
any trust. They are constantly nervous about competition, and they 
are constantly buying up new competitors in order tO' narrow the 
field. The United States Steel Corporation is gaining in its suprem^- 
acy in the American market only with regard to the cruder manufac- 
tures of iron and steel, but wherever, as in the field of more ad- 
vanced manufactures of iron and steel, it has important competi- 
tors, its portion of the product is not increasing, but is decreasing, 
and its competitors, where they have a foothold, are often more 
efficient than it is. 

Why? Why, w^th unlimited capital and innumerable mines and 
plants everywhere in the United States, can't they beat the other 
fellows in the market? Partly because they are carrying too much. 
Partly because they are unwieldy. Their organization is imperfect. 
They bought up inefficient plants along with efficient, and they have 
got to carry what they have paid for, even if they have to shut some 
of the plants up in order tO' make any interest on the investments ; 
or, rather, not interest on their investments, because that is an in- 
correct word, — on their alleged capitalization. Here we have a lot 
of giants staggering along under an almost intolerable weight of 
artificial burdens, which they have put on their own backs, and con- 
stantly looking about lest some little pigmy with a round stone in a 
sling may come out and slay them. 

B. CONDITIONS OF MONOPOLIZATION 
203. The Failure of Competition^- 

BY HENRY V^. MACROSTY 

Modern industry is essentially speculative in character. It has 
been said, "It is for the prospective, not for the actually existing, 
demand that a producer has chiefly to provide. Our warehouses and 
shops overflow with goods that have been produced before being 
sold, and with a view to their being sold. They have been produced 
to meet the prospective demand, and to measure that accurately is 

^^Adapted from Trusts and the State, 103-119. Published by E. P. Button 
& Co. (1901). . 



4o6 CURRENT ECONOMIC PROBLEMS 

not in the power of the most able and prudent man."^^ This state- 
ment apphes not only to goods for consumption, but also to goods, 
such as machinery, which are intended to aid production. The com- 
munity is interested only in the accommodation of the whole supply 
to the total demand, but it is to the interest of each individual manu- 
facturer to secure for himself as large a share of that demand as 
possible, without regard to the probability of there being an over- 
supply. To secure custom he must underbid his competitors ; to 
make the low price profitable he must reduce his expenses of produc- 
tion. There is thus a permanent stimulus to the improvement of 
organization and to the invention of new processes ; but as soon as 
these advantages are gained they are immediately lost by competi- 
tion, and the enhanced profits are either dissipated in expenses or 
handed over to the consumer. The old economists justified compe- 
tition on this very ground, that the desire for private gain drove 
capitalists to improve their industry, and then compelled them to 
part with their profits to the general public, but they arrived at this 
only by neglecting all the other aspects of the problem. 

The aim of trade is to make profits ; the object of making profits, 
according to commercial philosophy, is to make savings. The re- 
investment of savings in new industrial equipment is a necessary 
condition to industrial progress. Thus industrial development goes 
hand in hand with an increase in industrial equipment. 

This steady tendency to increase the productive machinery of 
the country necessarily intensifies competition. But if "competition 
is the life of trade," it is the death of business. The newcomers,, 
equipped with the newest methods and the latest discoveries, pro- 
duce more cheaply than their predecessors, and a race for life fol- 
lows, in the course of which more and more goods at lower prices 
are thrown on the market. If the low prices stimulate fresh demand, 
general benefit ensues, but the rate of production can govern con- 
sumption only within narrow limits. Owing to the great capacity 
of modern machinery, the operatives employed by the investment 
of savings can consume only a very small proportion of their prod- 
uct. An outlet must be found either in the discovery of new mar- 
kets, in countries yet to be developed, or in increased home con- 
sumption. The former involves questions of foreign policy and in- 
ternational competition, and must gradually diminish in importance 
as a solution. As for the latter, the inequitable distribution of 
wealth and the permanent maladjustment of purchasing and pro- 
ducing power necessarily create an incalculable disorganization of 

'^^Mongradien, The Displacement of Labor and Capital, 25 .(1886). 



CAPITALISTIC MONOPOLY 407 

industry, and profoundly increases the innate inability of the com- 
petitive system to balance demand and supply. 

In a limited market it is possible for the producer to forecast 
the probable demand and to estimate the capacity of his competitors 
to meet it ; but in proportion as the markets widen, both these neces- 
sary conditions of success, and especially the latter, become more dif- 
ficult of attainment. A farmer in Essex finds it beyond his power 
to reckon up the probable produce of a Dakota wheat-crop or the 
chances of a scarcity in Russia before he decides what acreage he 
will lay down in corn, and yet his inability may land him in the 
bankruptcy court. Scarcely less difificult is it for the Sheffield manu- 
facturer to foretell the probability of, say, a raid on rails by the Car- 
negie combination. What is true of normal conditions of trade holds 
good with reference to an abnormal demand, and the efforts to meet 
the latter generally have far-reaching and destructive consequences. 

The inability of the capitalist system to control its own produc- 
tivity must increase with an increase in the complexity of the organi- 
zation. The influence of machinery on production deserves par- 
ticular attention. Every invention causes displacement, both of cap- 
ital and of labor; and while its benefits are distributed over the 
whole community, its costs must be borne by individual capitalists 
and laborers. In America the invention of new labor-saving ma- 
chines proceeds so fast that machinery becomes antiquated before 
it is worn out, and the workshops are in a constant state of transi- 
tion. Usually capital suffers less than labor, because of its greater 
fluidity and its ability to recoup itself from the increased productivity 
of the inventions. And large businesses suffer less than small, as 
their powers of adaptation are greater, and therefore small concerns 
tend to go to the wall. But loss there usually is, and one generation 
of producers is sometimes ruined for the benefit of posterity. 

To sum up, we see that business under capitalism, working 
through competition, shows an inherent inability to equate supply 
to demand, which increases as the market widens. The savings of 
profits leads to overinvestment in productive appliances, from which 
follow overproduction, fall in prices, and depression. The depres- 
sion displaces labor, and the process increases the irregularity of 
employment. Reduction of profits also compels economies in manu- 
facture and transport, the greater employment of improved ma- 
chinery, and the invention of new processes. The increased pro- 
ductivity of capital causes a still greater reduction in prices and 
profits, and increases the tendency toward disorganization. It is 
from this situation that combination has been adopted as a means 
of escape. 



4o8 CURRENT ECONOMIC PROBLEMS 

204. The Incentives to Monopoly^* 

BY CHE;STER W. WRIGHT 

We have in modern capitalistic industry tendencies toward a 
widening of the market with increased locaHzation and integration 
and a steadily enlarging scale of production accompanied by a 
growing fierceness of competition. The larger the concerns, the 
smaller their number, the greater their resources for carrying on 
a fight, the bigger the prize which goes to the winner, the fiercer 
becomes the competition and the more excessive its wastes. Add 
to this the difficulties arising from the small margin of profit, the 
more complicated and prolonged industrial processes, the wider 
market, and the large use of fixed capital — and finally add the extra 
gain which comes from the power of monopoly to extort exorbitant 
prices, and one understands the forces which are fundamentally 
responsible for the modern trust movement. The reason for many 
trusts may be found in more immediate causes, which, for the very 
reason that they are more immediate and obvious, have often ap- 
peared, to the public eye at least, as even more important. 

It is doubtless true that a considerable number of trusts owe 
their origin to the profits which it was expected would accrue to 
the promoter who undertook the task of organizing the trust. This 
was especially the case in the promotion which went on during the 
years 1898 and 1901, when the money market and other conditions 
were particularly favorable; but it is not likely that we shall soon 
see a recurrence of such an era. There can be no question, how- 
ever, that the lax corporation laws, many of which appear to have 
been especially designed to meet the promoter's needs, did enable 
him to make certain gains and to dispose oi the securities put out 
at a somewhat higher price than would otherwise have been pos- 
sible. Still, it must be borne in mind that the more fundamental 
causes for the growth of trusts were really at the bottom of even 
these gains. 

Most prominent among the second group of more immediate 
causes for the growth of trusts — those which I call special 
privileges — -are railroad favors, tariff duties, and patent rights. In 
former years railroad favors of one sort or another were doubtless 
given to many of the trusts. From time to time announcements 
have been made that these discriminations had been abolished ; but 
frequently, as some later special investigation or prosecution re- 

"Adapted from "The Trust Problem — Prevention versus Alleviation," in 
the Journal of Political Economy, XX, 578-581 (1912). 



CAPITALISTIC MONOPOLY 409 

vealed the facts, it has been found that they still exist. However, 
the evil is undoubtedly much less frequent than formerly and today 
is at best but a minor factor. The tariff is probably of more im- 
portance as an aid to the trusts, though I am inclined to believe that 
its influence has been considerably exaggerated. Probably its chief 
eft"ect is in enabling trusts, most of which would exist in any case, 
to exact somewhat higher prices for their products than would 
otherwise be possible. It should be noted, however, that it is the 
over-protective tariff' which offers the chief incentive for the for- 
mation of trusts. It is because the duties are often so much higher 
than is necessary to maintain the industry that overproduction en- 
sues and the domestic manufacturers are led to combine so as to 
secure the high profits made possible by the tariff. To enact duties 
oif this character is to do^ nothing less than to offer a reward for 
forming a trust. The importance of patent rights as a basis for 
trusts probably deserves more attention than it has received. 

The third group of minor causes for the growth of trusts in- 
cludes certain methods of competition, notably factor agreements 
and discriminating prices. Under such agreements the manufac- 
turer or wholesaler may sell his product on condition that the price 
which he fixes be absolutely maintained, or on condition that the re- 
tailer shall not deal in the competing product of any rival, or per- 
haps that he shall not sell such rival product below a certain price. 
Any concern putting out a product for which there is a considerable 
demand can use this system, especially the latter form, against its 
rivals with tremendous power and effectiveness. The practice of 
discriminating prices is also a powerful weapon for building up 
and maintaining monopoly control. 

Closely connected with this is the power exercised by control 
of credit which is sometimes declared toi be an important weapon 
of the trust. On this point it is impossible at present to speak 
decisively. Information is very difficult to obtain and usually con- 
flicting. There is some reason to believe that a large concern with 
the close financial alliances which ordinarily accompany it may oc- 
casionally find itself in a position where it can control the credit 
obtainable by a rival at some crucial moment and through the power 
thus obtained may force that rival to capitulate, often at a heavy 
loss, as in the case of the Pennsylvania Sugar Refining Company. 
There may not be a money trust but apparently there are times 
when the power of centralized control over large masses of capital 
proves of great advantage to a big corporation. 



4IO CURRENT ECONOMIC PROBLEMS 

205. Large-Scale Production and Monopoly^^ 

BY CHARLES J. BUIvIvOCK 

In favor of the proposition that the tendency of large-scale 
production is to pass over into monopoly, three general lines of 
argument may be distinguished: (a) the contention that a con- 
solidated enterprise possesses advantages over independent com- 
panies in producing and marketing its goods ; (b) the claim that 
mere mass of capital confers powers of destructive warfare so great 
as to deter possible competitors from entering the field; (c) the 
belief that modern competition between large rival establishments, 
representing heavy investments of fixed capital, is injurious to the 
public, ruinous to the producers, and in its final outcome self-de- 
structive. As our discussion proceeds it will become evident to the 
reader that all of these arguments can be employed, with consist- 
ency, only by those who believe that the competitive regime is to 
be replaced by an era oi monopoly. 

First in this list is the contention that a consolidated concern 
is a more efficient agent of production and exchange. Thus it is 
claimed that trusts, by filling orders from the nearest plant, can 
effect a great saving in cross-freights. Data upon this question are 
available in the recent Bulletin of the Department of Labor. Of 
the forty-one combinations reporting, twenty-seven failed to answer 
this question, nine claimed a saving from this source, and five 
stated that there was no gain. Of the nine reporting a saving, 
the Bulletin states the amount only in three cases ; and in twO' of 
these the item of cross-freights was combined with other econoimies, 
the aggregate sums being $400,000 and "considerably over 
$500,000." This, be it remembered, is the trusts' own showing, 
and is certainly not an underestimate. The reason for these com- 
paratively small results is not difficult tO' discover. When the mon- 
opolized product is of a bulky sort, the industry is already localized 
pretty thoroughly before combination takes place; and, since most 
of the former independent establishments were producing chiefly 
for their natural local constituencies, the trust can save little in 
cross-freights. When, however, the product is light, transportation 
charges become a matter of small moment. In either case the room 
for saving in cross-freights is not nearly as large as has been repre- 
sented, while Oiften it does not exist. 

Then it is urged that a trust can draw upon all the patented 
devices of the constituent companies, and employ only those that 

^^Adapted from "Trust Literature : A Survey and a Criticism," in the 
Quarterly Journal of Economics, XV, 190-210. Copyright (1901). 



CAPITALISTIC MONOPOLY 411 

are most efficient. But advantages accruing from this fact will in 
most cases prove tO' be of a temporary nature, as trusts that have 
tried to base a monopoly upon the control of all available patents 
have learned in the past, and will learn in the future. Moreover, a 
simple reform in our patent laws will make the best processes avail- 
able for all producers for any time that the public finds such a 
measure to be necessary for protection against monopoly. Here, 
then, we find no natural law working resistlessly towards combi- 
nation, but a man-made device which can be regulated as public 
policy may dictate. 

Again, we are told that a trust can produce more cheaply than 
separate concerns, because all the plants utilized can be run at their 
full capacity ; whereas, under competition, many establishments can 
be kept in operation but a part of the time. Some observations may 
be made concerning this claim. 

In general, it may be denied that, whenever governmental in- 
terference has not produced unhealthy and abnormal conditions, 
competition has led to such absurdly excessive investments as is 
commonly assumed. We must concede, however, that under nor- 
mal conditions some reduction can be made in the number of plants 
required to supply the market at ordinary times ; but this does not 
dispose of the matter. If a trust is tO' be prepared for supplying 
the market promptly in timies of rapidly increasing demand, it is 
necessary that some surplus productive capacity must exist in 
periods of stationary or decreasing demand; for, as believers in 
the tendency to monopoly often remind us, many months, or even 
one or twO' years, are required for the construction of new plants. 
When this fact is taken into acco'unt, the case will stand as follows : 
except where the action of government has produced abnormal 
conditions, the capacity of competing establishments does not ex- 
ceed the requirements of the market to any such degree as is com- 
monly assumed ; even a trust must provide for periods of expanding 
trade ; even then, not all rival establishments suffer seriously from 
inability tO' find continuous emploiyment for their plants, so that 
probably the advantages secured by the trust are of consequence 
only when the least fortunate or least efficient independent concerns 
are made the basis of comparison. 

Again, we are reminded of advantages in buying materials or 
selling products. It is urged that a combination can purchase its 
raw materials more cheaply than separate concerns. No one doubts 
that a large company can often secure better terms than a small 
establishment ; but it is not so clear that • every trust can secure 
supplies more cheaply than large independent enterprises, unless 



412 CURRENT ECONOMIC PROBLEMS 

it is true that all combinations can arbitrarily depress the prices 
of the materials which they consume. Undoubtedly, this has been 
done by sonne of the trusts, although their partisans deny it ; but 
such a saving represents no social gain, and sometimes it may be 
possible for would-be competitors to profit by the depressed con- 
dition of the market for raw materials. 

And, finally, we come to- economies in advertising and in solicit- 
ing business, where the wastes of competition are certainly serious 
and the room for improvement correspondingly great. Those who 
deny the tendency to monopoly generally admit that a trust can 
have a material advantage here, while those who' affirm the exist- 
ence of such a tendency evidently realize that their case is strong- 
est at this point. Yet an opportunity for saving in these depart- 
ments does not always exist, and the extent of the economy is easily 
exaggerated in other cases. Mr. Nettleton is right when he says : 
"But to what extent the trust organizers have counted on prac- 
tically cancelling expenditure for these two items, on the ground 
that buyers will be obliged to^ come tO' the sole manufacturers, they 
are likely to be surprised. To an extent which few appreciate, the 
buying public has become accustomed to being reminded of its 
needs before making purchases. Kxcept in staple and absolutely 
necessary commodities, demand is largely created and maintained 
by advertising through periodicals, catalogues, or travelling sales- 
men. Hence, the trust that expects to save the bulk of this import- 
ant item must also expect to lose through diminished sales more 
than the economy represents. This is not theory, but the testimony 
of leading dealers in many lines." 

We must now take into account certain counteracting forces, 
upon which some writers rest their belief that competition will ulti- 
mately prevail. These economists contend, in the first place, that, 
outside the field of the natural monopolies, the growth of a busi- 
ness enterprise is limited by the fact that companies of a certain 
size will secure "maximum efficiency" of investment, and that be- 
yond this point concentration brings no increase in productive ca- 
pacity. This position is based upon the belief that a factory of a 
certain size will enable machinery to be employed in the most 
advantageous manner; that a reasonable number of such plants 
will make possible all needful specialization of production ; that 
allied- and subsidiary industries can be, and are, carried on by large 
independent concerns ; and that the cost and difficulties of super- 
vision increase rapidly after a business is enlarged beyond a certain 
size, especially when it is attempted to unite plants situated in difiFer- 
ent parts of the country. For this reason, increased output does 



CAPITALISTIC MONOPOLY . 413 

not decrease the burden of fixed charges after a company attains 
a certain magnitude; but, on the contrary, new charges arise. 
Among such new expenses, not the least important are the cost of 
employing the most skilled legal talent to steer the combination just 
close enough to the law, the expenses necessary for "legislative" 
and "educational" purposes, and the outlays for stifling competition 
or the continual "buying out" of would-be rivals. 

It is argued that an established monopoly will suffer actual loss 
from listless and unprogressive management. As the New York 
Journal of Commerce rightly insists, "It is not to be denied that 
such concentrations of management will be subject to countervail- 
ing offsets from the absence of the stimulus of competition ; from 
the uncertainty about the management falling into the best pos- 
sible hands ; from the discouragement to invention which always 
attends monopoly, and from the poissibility that the administration 
may be intrusted to 'friends' rather than to experts." As Professor 
Clark suggests, an established monopoly, secure in the possession 
of the markets of a large country "would not need to be forever 
pulling out its machines and putting in better," sO' that, as com- 
pared with countries where industr}^ is upon a competitive basis, 
such a combination would fall behind in the struggle for interna- 
tional trade. In ruthlessly and unceasingly displacing expensive 
machinery with newer and better appliances, American manufac- 
turers have probably led the world; but monopolies will inevitably 
feel reluctant to continue such an energetic policy of improvement. 
As combinations obtain a greater age, they will persist in old and 
established methods ; while nepotism and favoritism, tending to- 
wards hereditary ofiice-holding will replace the energetic manage- 
ment that some of the trusts now display. 

Here we may refer to two of the alleged advantages of trusts. 
It is said that combinations develop abler management through 
the opportunity they afford for a specialization of skill upon the 
part of their officials, and that efficiency is increased by a compari- 
son of the methods and costs of production in the various plants. 

When it is contended that the "strength of the trust is that it 
gives the opportunity for the exercise of these highest qualities of 
industrial leadership," and that it gives us "a process of natural 
selection of the very highest order," we may question whether stock 
speculation and other causes lying outside the sphere of mere pro- 
ductive efficiency have not had more to do with the formation of 
recent combinations than demonstrated superiority in business man- 
agement. And, it may be asserted that the establishment of per- 
manent monopoly will interfere seriously with the future process 



414 CURRENT ECONOMIC PROBLEMS 

of selection. It must be rememb.ered that the able leaders now 
at the head of the successful trusts were developed out of a field 
which afforded the widest opportunity for creative ability. The 
supreme qualities requisite for great industrial leadership are not 
likely to be fostered by a regime which closes each important branch 
of manufactures to new enterprise, and renders hopeless all com- 
petition with a single consolidated co^mpany. Will successive gen- 
erations of bureau chiefs or heads of departments in long-estab- 
lished corporations be able to continue the race of masterful leaders, 
which freedom in originating and organizing independent industries 
has given us in the present age? 

The second argument advanced to prove the tendency to mon- 
opoly is the claim that miere mass of capital confers such powers 
of destructive warfare as to deter possible competitors from en- 
tering the industry, at least until prices have long been held above 
the competitive rate. It is said that a large combination can lower 
prices below the cost of production in any locality where a small 
rival concern is established, thus driving it out of the field. With- 
out doubt the destructive competition waged by combinations is 
an important consideration, and it may well enough re-enforce mon- 
opoly where other attendant circumstances favor consolidation. But 
a monopoly based solely upon this power would be, confessedly, a 
temporary affair; for probably no one would claim that all capital- 
ists would be intimidated permanently by such circumstances. 

The final reason for the belief that combinations must ulti- 
mately prevail is found in the character of modern competition in 
these industries which require heavy investments of fixed capital. 
Under such conditions the difBculty of withdrawing specialized in- 
vestments and the losses that are entailed by a suspension of pro- 
duction make competition so intense that prices may be forced 
far below a profitable level without decreasing the output ; and in- 
dustrial depression inevitably follows. 

In support of this line of argument, it is said that trusts are 
beneficial, because they can "exercise a rational control over indus- 
try," and "adjust production tO' consumption." Thus it is believed 
that commercial crises can be prevented, or, at least, that their worst 
effects can be avoided. But such arguments overlook the facts that 
a restriction placed upon production by a trust, especially if this 
is sufficient to raise prices above the competitive rate, may react 
injuriously upon other trades; and that monopoly profits, accruing 
to a small body of capitalists for a long period of time, must con- 
stitute a tax upon the body of the people that will affect the dis- 
tribution of wealth in such a way as to reduce the consuming power 



CAPITALISTIC MONOPOLY 415 

of the masses. A reduction in purchasing power thus produced 
would render excessive the existing investments in staple indus- 
tries, and produce crises. 

Not only is it doubtful whether monopoly is a wise method 
of regulating industry, hut it is certain that the evils of compe- 
tition are greatly exaggerated in some cases, while in others they 
are due to^ unhealthful conditions for which an interference with 
industrial freedom is responsible. In many other industries where 
trusts have been formed, the excessive investment of which writers 
complain was caused by the undue stimulus given by high protective 
duties and by the restriction of foreign competition. Competition 
is restricted by protective duties in most of the industries where 
combinations are formed ; these duties increase the severity, and 
perhaps the frequency, of the fluctuations from which business 
suffers ; then trusts, a further restriction of freedom, are advocated 
as a remedy for the ills caused by the initial interference with in- 
dividual enterprise; and, finally, in order to regulate the trusts, an 
elaborate system of public supervision is proposed. Would it not 
be well tO' make a genuine trial of competition before condemning 
it for producing evils which are greatly increased by governmental 
interference with industrial freedom? 

206. Monopoly and Efficiency^^ 

BY LOUIS D. BRANDEIS 

Earnest argument is constantly made in support of monopoly 
by pointing to the wastefulness of competition. Undoubtedly com- 
petition involves some waste. What human activity does not? The 
wastes of democracy are among the greatest obvious wastes, but 
we have compensations in democracy which far outweigh that 
waste and make it more efficient than absolutism. So it is with 
competition. The margin between that which men naturally do 
and which they can do is so great that a system which urges men on 
to action, enterprise and initiative is preferable in spite of the wastes 
that necessarily attend that process. I say "necessarily" because 
there have been and are today wastes incidental to competition that 
are unnecessary. Those are the wastes which attend that compe- 
tition which does not develop, but kills. Those wastes the law can 
and should eliminate. It may do so by regulating competition. 
It is, of course, true that the unit in business may be too small 
to be efficient. The larger unit has been a common incident of 
monopoly. But a unit too small for efficiency is by no means a 

^"Adapted from an article in American Legal News, XXIV, 8-12 (1913). 



4i6 CURRENT ECONOMIC PROBLEMS 

necessary incident of competition. It is also true that the unit in 
business may be too large to be efficient, and this is no uncommon 
incident of monopoly. In every business concern there must be 
a size-limit of greatest efficiency. What that limit is will differ in 
different businesses and under varying conditions in the same busi- 
ness. But whatever the business or organization there is a point 
where it v/ould become too large for efficient and economic man- 
agement, just as there is a point where it would be too small to 
be an efficient instrument. The limit of efficient size is exceeded 
when the disadvantages attendant upon size outweigh the advan- 
tages, when the centrifugal force exceeds the centripetal. Man's 
work often outruns the capacity of the individual man; and, no 
matter what the organization, the capacity of an individual man 
usually determines the success or failure of a particular enterprise, 
not only financially to the owners, but in service to the community. 
Organization can do much tO' make concerns more efficient. Organ- 
ization can do much to make larger units possible and profitable. 
But the efficiency even of organization has its bounds; and organ- 
ization can never supply the combined judgment, initiative, enter- 
prise and authority which must come from the chief executive of- 
ficers. Nature sets a limit tO' their possible accomplishment. As 
the Germans say : "Care is taken that the trees do not scrape the 
skies." 

That mere size does not bring success is illustrated by the 
records of our industrial history during the past ten years. This 
record, if examined, will show that: 

(i) Most of the trusts which did not secure monopolistic 
positions have failed to show marked success as compared with 
the independent concerns. 

This is true of many existing trusts, for instance, of the News- 
paper Trust, the Writing Paper Trust, the Upper Leather Trust, 
the Sole Leather Trust, the Woolen Trust, the Paper Bag Trust, 
the International Mercantile Marine ; and those which have failed, 
like the Cordage Trust, the Mucilage Trust, the Flour Trust, should 
not be forgotten. 

(2) Most of those trusts which have shown marked success 
secured monopolistic positions either by controlling the whole busi- 
ness themselves, or by doing so in combination with others. And 
their success has been due mainly to their ability to fix prices. 

This is true, for instance, of the Standard Oil Trust, the Shoe 
Machinery Trust, the Tobacco Trust, the Steel Trust, the Pull- 
man Car Company. 



CAPITALISTIC MONOPOLY 417 

(3) Most of the trusts which did not secure for themselves 
moiiopoly in the particular branch of trade, but controlled the situ- 
ation only throug-h price agreements with competitors have been 
unable to hold their own share of the market as against the inde- 
pendents. 

This is true, for instance, of the Sugar Trust, the Steel Trust, 
the Rubber Trust. 

(4) Most of the efficiently managed trusts have found it neces- 
sary to limit the size of their own units for production and for 
distribution. 

This is true, for instance, of the Tobacco Trust, the Standard 
Oil Trust, the Steel Trust. 

Lack of efficiency is ordinarily manifested either 
(t) in rising cost of product, 

(2) in defective quality of goods produced, or 

(3) in failure to make positive advances in processes and 
methods. 

The third of these manifestations is the most serious of all. In 
this respect monopoly works like poison which infects the system 
for a long time before it is discovered, and yet a poison so potent 
that the best of management can devise no antidote. 

Take the case of the Steel Trust. It inherited through the Car- 
negie Company the best organization and the most efficient steel 
makers in the world. It has had since its organization exceptionally 
able management. It has almost inexhaustible resources. It pro- 
duces on so large a scale that practically no experimental expense 
would be unprofitable if it brought the slightest advance in the 
art. And yet: "We are today something like five years behind 
Germany in iron and steel metallurgy, and such innovations as are 
being introduced by our iron and steel manufacturers are most oi 
them merely following the lead set by foreigners years ago." 

The Shoe Machinery Trust, the result of combining directly 
and indirectly more than a hundred different concerns, acquired 
substantially a monopoly of all the essential machinery used in 
bottoming boots and shoes. Its energetic managers were conscious 
of the constant need of impro'ving and developing inventions and 
spent large sums in efforts to do so. Nevertheless, in the year 1910 
they were confronted with a competitor so formidable that the Com- 
pany felt itself obliged to buy him off, though in violation of the 
law and at a cost of about $5,000,000. That competitor, Thomas G. 
Plant, a shoe manufacturer who had resented the domination of 
the trust, developed an extensive system of shoe machinery, which 



4i8 CURRENT ECONOMIC PROBLEMS 

is believed to be superior to the Trust's own system, which repre- 
sents the continuous development of that Company and its prede- 
cessors for nearly half a century. 

But the efficiency of monopolies, even if established, would not 
justify their existence unless the community should reap benefit 
from the efficiency ; the experience teaches us that whenever trusts 
have developed efficiency, their fruits have been absorbed almost 
wholly by the Trusts themselves. From such efficiency as they have 
developed the community has gained substantially nothing. For in- 
stance : 

The Standard Oil Trust, an efficiently managed monopoly, in- 
creased the prices of its principal products between 1895 and 1898, 
and 1903 to 1906 by 46 per cent. 

The Tobacco Trust is an efficiently managed monopoly. Be- 
tween 1899 and 1907 the selling price on smoking tobacco rose from 
2 1. 1 cents per pound to 30.1 cents; the profit per pound from 2.8 
cents per pound to 9.8 cents. The selling price of plug tobacco rose 
from 24.9 cents per pound to 30.4 cents ; the profit per pound from 
1.9 cents to 8.7 cents. 

The Steel Trust is a corporation of reputed efficiency. The high 
prices maintained by . it in the industry are matters of common 
knowledge. In less than ten years it accumulated for its share- 
holders or paid out as dividends on stock representing merely water, 
over $650,000,000. 

C. THE INFLUENCE OF MONOPOLY ON PRICE 
207. The Law^ of Monopoly Price^^ 

BY HENRY ROGERS SEAGER 

Monopolists tend to fix those prices for their products which will 
yield the largest monopoly profits. What this means may be made 
to appear from a simple illustration. 

Consider the case of a patented article in general use, like a 
special brand of soap. As a rule the expense of producing such an 
article diminishes as the number of units produced is increased. On 
the other hand, as the number of units offered for sale increases, 
the price that can be secured from each unit decreases. Suppose the 
volume of sales at different prices, the expense of production per 
unit for these different quantities sold, and the monopoly profits 
received are as represented in the table on the following page. It 
is clear that here the price that affords the maximum monopoly 

^^ Adapted from The Principles of Economics, 219-221. Copyright by 
Henry Holt & Co. (1913). 



CAPITALISTIC MONOPOLY 



419 



profit will be ten cents. Until this price is reached the larger volume 
of sales and diminishing expense per unit more than counterbalance 
the loss due to lowering the price. Below ten cents the loss in price 
is no longer offset by these factors, although they continue to operate, 
and consequently profits decline. As the table indicates, monopoly 
price does not necessarily mean high price. In actual practice the 
margin of monopoly profit is likely to be quite small except for goods 
the demand for which is quite elastic. 



Price 


No. of Cakes 
Sold 


Gross Receipts 


Expense per 
Cake 


Gross Expense 


Profits 


25 cents 


400,000 


$100,000 


8 cents 


$ 32,000 


$ 68,000 


20 " 


600,000 


120,000 


7 


42,000 


78,000 


IS '' 


1,000,000 


150,000 


6 " 


60,000 


90,000 


10 


2,500,000 


250,000 


5 


125,000 


125,000 


9 " 


3,000,000 


270,000 


4f " 


145,714 


124,286 


8 " 


3,500,000 


280,000 


4f " 


165,000 


115,000 


7 " 


4,000,000 


280,000 


4f " 


185,000 


95,000 



When a monopolist enjoys exclusive control of the monopolized 
good, he may fix the price at the point affording the maximum profit 
without fear of exciting competition. But few monopolists are so 
fortunately situated. Competition is an ever-present possibility. 
Prudence dictates usually a more conservative policy than that 
which would secure for the time being the largest monopoly profits. 
In the case above the price is likely to be fixed at something less than 
ten cents in the expectation that the present loss will be more than 
made good by the protection of the monopoly from future competi- 
tion. In the same way fear of governmental regulation often checks 
the rapacity of monopolists long before such regulation is actually 
undertaken. The law of monopoly price thus indicates the extreme 
limit to which monopolists are likely to go in fixing prices and not 
necessarily the price that they will actually charge under the prac- 
tical limitations which control their conduct. 

In the case of many monopolized products there are different 
strata of demand, each controlled by somewhat different considera- 
tions. This may also be illustrated by reference to the demand for 
such an article as soap. Many consumers would prefer to pay fifty 
cents a cake for soap if they believed that by so doing they were get- 
ting a better article than their neighbors. Taking advantage of this 
fact, the shrewd monopolist offers several different grades for sale 
at different prices. That intended for the mass of consumers is put 
out under the firm name simply at the price — say ten cents — calcu- 
lated to afford the maximum monopoly gain. Along with this is 
offered at a higher price — say twenty-five cents — the same article 



420 CURRENT ECONOMIC PROBLEMS 

colored a little differently or pressed into a different shape, which 
is designated "superior." A dash of inexpensive scent and a more 
elaborate wrapper transforms "superior" soap into "superfine" and 
insures a limited sale at fifty cents a cake. In this way not only a 
large margin of profit is secured on the supposedly better grades, 
but consumers are reached who would never think of buying plain, 
ordinary soap. 

This practice is by no means confined to manufacturers of pat- 
ented toilet articles. It is found in connection with nearly every 
kind of commodity which enters into personal consumption. Makers 
of bicycles and automobiles, manufacturers of patented foods and 
beverages, fashionable tailors and haberdashers, and many others 
recognize the opportunity for profit along this line, and conduct their 
business accordingly. The resulting complication in the theory of 
monopoly price is easily understood. Instead of making calcula- 
tions relative to consumers' demand as a whole, the monopolist 
makes special calculations in regard to the extent and the intensity 
of the demand of each class of consumers. 

The law of monopoly price may be summed up in the maxim, 
"Ask that price which is calculated to yield in the long run the 
maximum monopoly profit." To decide what that price is the 
monopolist must gauge the extent and intensity of consumers' de- 
mand both as a whole and as manifested by different classes. He 
must then calculate his own expenses of production for different 
quantities of the monopolized good. His first concern will usually 
be to put out the standard grade at a price which will afford the 
largest monopoly profit. If the demand is elastic this price is more 
likely to be moderate than high. Having fixed the price for the 
standard grade, the monopolist will consider whether it would not 
be profitable to offer superior, superfine, or other grades to par- 
ticular classes of consumers at higher prices. In connection with 
each grade he must make a calculation similar to that originally 
made, and he must also consider how the sales of these superior 
grades will react upon the sales of the good of standard quality. 

208. The Limits o£ Monopoly Price^® 

BY JOHN A. HOBSON 

The real danger of Trusts in their control of prices appears when 
we consider the control in relation to the various classes of com- 
modities which form the subjects of monopoly. 

^^Adapted from The Evolution of Modern Capitalism, new and revised 
edition, 230-233. Published by Charles Scribner's Sons (1906). 



CAPITALISTIC MONOPOLY 421 

1. The urgency of the need which the commodity satisfies de- 
termines the height of the price which the monopoHst can charge. 
Where a community is dependent for its life upon some single com- 
modity, the monopoHst is able to obtain a high price for the whole 
of a supply which does not exceed what is necessary to keep alive 
the whole population. Thus the monopolist of corn in a famine 
can get an exorbitant price. But if the supply is more than suffi- 
cient to enable everyone to satisfy the most urgent need of subsist- 
ence, the urgency of the need satisfied by any further supply falls 
rapidly. 

The monopoly of a necessity of life is, therefore, more dangerous 
than any other monopoly, because it not merely places the lives of 
the people at the interest of traders but makes it of interest to such 
monopolists to limit supply to the satisfaction of the barest neces- 
sities of life. 

Next to a necessity will come what is termed a "conventional 
necessity," something which by custom has been firmly implanted 
as an integral portion of the standard of comfort. This differs with 
different classes in the community. Boots may now be regarded a 
"conventional necessity," and a monopolist could probably raise their 
price considerably without greatly diminishing the consumption. 

As we descend in the urgency of wants we find that the comforts 
and luxuries form a part of the standard of life of a smaller and 
smaller number of people. Since they satisfy intrinsically weaker 
needs, the demand for them is more likely to fall with a rise in 
price. 

2. Closely related is the possibility of substituting another com- 
modity for the one monopolized. This everywhere tempers the 
urgency of the need attaching to a commodity. There are few, if 
any, even among the commodities on which we habitually rely, that 
we could not and would not dispense with if their price rose very 
high. The incessant competition between different commodities for 
the satisfaction of the same need cannot be gotten rid of by a 
monopoly of one of them. Though to a modern society artificial 
light is much more important than cane sugar, a Sugar Trust may 
have a stronger monopoly than an Oil Trust, because the substitutes 
for cane sugar, such as molasses and beet-root, are less effective 
competitors than gas, candles, and electricity with oil. 

The reverse consideration, the possibility of extending consump- 
tion and securing a wider market for an article by substituting an 
article of monopoly for other articles, has quite an important influ- 
ence on price. The possibility of substituting oil for coal in cook- 
ing has a great deal to do with the low price of oil. A Trust will 



422 CURRENT ECONOMIC PROBLEMS 

often keep prices low for a season to enable their article to under- 
sell and drive out a rival article. When natural gas was discovered 
in the neighborhood of Pittsburgh, the price was lowered sufficiently 
to induce a large number of factories to give up coal and burn gas. 
After expensive fittings were put in and the habit of using estab- 
lished, the gas company proceeded to raise the rates lOO per cent. 
When we ascend to the higher luxuries, the competition between 
different commodities to satisfy the same generic want, or even to 
divert taste or fashion from one class of consumption to another, 
is highly complicated, and tempers considerably the power of a 
Trust over prices. 

In like manner the power over prices possessed by a company 
whose monopoly rests upon patent rights is limited by the ability 
of consumers to substitute other articles for the article in question. 
For instance, the price-control of the manufacturer of a patented 
corkscrew is qualified very largely, not only by competition of other 
corkscrews, but by screw-stoppers and various other devices for ob- 
taining access to the contents of bottles. 

3. There is also the influence of potential competition of other 
producers upon monopoly prices. The ability of outside capital to 
enter into competition will, of course, differ in different trades. 
Where the monopoly is protected by a tariff the possibihty of new 
competition from outside is lessened. When the monopoly is con- 
nected with some natural advantage or the exclusive possession of 
some special convenience, as in mining or railways, direct competi- 
tion of outsiders on equal terms is prohibited. Where the combina- 
tion of large capital and capable management is indispensable to the 
possibility of success in a rival producer, the power of the monopoly 
is stronger than where a small capital can produce upon fairly equal 
terms. If the monopoly is linked closely with personal qualities and 
with special opportunities of knowledge, as in banking, it is most 
difficult for outside capital to compete effectively. 

These considerations show that the power of the Trust over 
prices is determined by a number of intricate forces which react 
upon one another with varying degrees of pressure. 



CAPITALISTIC MONOPOLY 423 

D. TYPES OF UNFAIR COMPETITION 

^og. Competitive Methods in the Tobacco Business^^ 

BY ME;yER JACOBSTKIN 

The most familiar as well as the most effective device employed 
for stifling competition has been that of "local competition" — under- 
selling a competitor in his own limited market while sustaining 
prices elsewhere. This device is feasible only for large companies 
that can make temporary sacrifices for the possibility of greater 
gains in the future. In the early nineties, to check the sale of 
"Admiral" cigarettes manufactured by an independen't concern, 
the American Tobacco Company offered its leading brand, "Sweet 
Caporal," at cost, but only in regions where the Admiral was being 
successfully marketed. The independent concern surrendered soon 
afterward. In 1901, the American Tobacco Company was selling 
"American Beauty" cigarettes for $1.50 per thousand, less two per 
cent discount for cash, when the revenue tax alone was $1.50 per 
thousand. This was done, however, only where an independent 
company had succeeded in marketing its most popular brand, the. 
"North Carolina Bright." New York jobbers found that by purchas- 
ing their cigarettes from North Carolina jobbers, after paying a 
slight premium in addition to freight charges, they would pay less 
for them than by buying direct from: the Trust in New York City. 

The local competition which helped to build up the Cigarette 
Trust was practiced in the sale of other products. During the strug- 
gle for the plug market between the Continental and Liggett & 
Myers, the former was offering its "Battle Ax" brand for thirteen 
cents a pound, which was below the cost of production, since the tax 
was six cents and the raw leaf seven cents a pound. After the inde- 
pendent concern was absorbed, "Battle Ax" rose to thirty cents a 
pound. By similar methods the trust has won extensive markets in 
England and Japan. 

An instrument frequently employed to make local competition 
effective is the "Factors' Agreement," whereby the jobber is offered 
special rebates for agreeing to handle Trust goods exclusively, or to 
boycott independent brands. While a 2^ per cent commission was 
allowed jobbers who did not discriminate against Trust goods, 7^ 
per cent was given to those who handled Trust goods exclusively. 
Frequently orders from concerns carrying in stock independent 
goods were not filled. The Factors' Agreement is especially potent 

^"Adapted from The Tobacco Industry in the United States, 117-121. 
Copyright by the author. Published in the Columbia Studies Series (1907). 



424 CURRENT ECONOMIC PROBLEMS 

in crushing any new competition in markets already controlled b 
the Trust, for the jobber is loath to risk his assured profits, derive 
from the sale of established Trust brands, in exchange from th 
doubtful income from new, independent goods. 

A closely allied device is that known as "Brand Imitation." Thi 
is a most direct form of destructive competition : it consists of sellin 
at reduced prices brands which are apparently imitations of popn 
lar brands of independent manufacturers. An instance of this i 
the marketing at a low figure by the Trust of the "Central Union 
smoking tobacco in direct competition with the "Union Leader" o 
an independent concern. The Trust distributed its "Central Union 
free to jobbers in order to ruin the "Union Leader." It was nc 
until the reputation of the independent brand had been seriousi 
damaged that the courts enjoined the Trust from further free dis 
tribution. Similarly the Trust marketed at a low price a brand i: 
imitation of the "Qboid" tobacco manufactured by Larus & Brother; 
As value of a brand is one of the important assets in the tobacc 
trade, these methods are very ruinous to independent manufacturer 
who cannot withstand a persistent attack from the Trust. 

Another device is the use of the coupon system, whereby the con 
sumer receives a premium certificate equivalent to a lo per cent re 
bate. The coupon system is especially valuable in the tobacco trad 
because it serves as a substitute for the cutting of prices, the latte 
being difficult, owing to the existence of conventional and conven 
ient prices, five cents and multiples of five. It is more feasible t 
give coupons than to reduce a five-cent cigar to four cents. Sine 
much of the tobacco trade is transient, the successful operation o 
the premium plan depends upon a wide distribution of stores tha 
offer the coupons, as through a chain of retail agencies like thi 
United Cigar Stores. 

210. Competitive Methods in the Cash Register Business^" 

BY HE;NRY ROGERS STAGER 

The specifications in the indictment against the National Casl 
Register Company, on the basis of which twenty-seven of its officer; 
were found guilty by a jury in February, 1913,'^ indicate in a concret 

""Adapted from The Principles of Economics. 453-455. Copyright b; 
Henry Holt & Co. (1913). 

*^In June, 191S, the Supreme Court of the United States refused to sus 
tain an appeal from the decision of a higher federal court reversing th 
decision of the lower court referred to in the text, and acquitting the offi 
cers of the National Cash Register Company. This closes the case agains 
them. — Editor. 



CAPITALISTIC MONOPOLY 425 

way the kind of practices in which some of the trusts engaged. They 
were: 

1. It bribed the employees of competitors to reveal the secrets 
of the competitors' business. By this means it obtained knowledge 
of prospective buyers of cash registers, of those who had purchased 
them but had not fully paid for them, of the volume of business be- 
ing done by the competitors and the places in which it was being 
done, of inventions and applications for patents by the competitors, 
and of their financial condition and connections. 

2. It bribed the employees of truckmen, express companies, 
railways, telegraph and telephone companies to reveal information in 
regard to the shipping of cash registers by competitors, and in regard 
to the communication between the competitors and their agents and 
customers. 

3. It used its influence with banks and other institutions, some- 
times going to the extent of making false statements to injure the 
credit of competitors in order to prevent their securing money for 
carrying on their business. 

4. It required its sales agents to interfere in every way with the 
sales of competitive cash registers. The means used included the 
making of false statements with regard to the registers themselves, 
as well as false statements reflecting injuriously upon the business, 
character, and financial credit of its competitors. 

5. It offered to sell to prospective purchasers of competitive 
cash registers the National's machines at much less than the stand- 
ard prices and upon unusually favorable terms. 

6. It induced persons who had already ordered competitive cash 
registers to cancel their orders and purchase from the National, by 
making further reductions in the price of National registers equiva- 
lent to the amount already paid in on the purchase of the competitive 
cash registers. It induced persons who had already bought other 
registers to exchange them for the machines of the National, where- 
upon it exhibited in the windows of stores where National machines 
were for sale these machines with placards containing the word 
"Junk," or the words "For Sale at Thirty Cents on the Dollar." 

7. It offered for sale to prospective purchasers of other ma- 
chines cash registers made in imitation of those others at prices even 
lower than manufacturer's cost. These thus offered for sale were 
known as "knockers." The manufacture of a particular type of 
"knocker" was discontinued as soon as its use was no longer nec- 
essary. 

8. It sometimes offered for sale "knockers" having weak and 
defective mechanism. This practice had two purposes. It enabled 
the sales agent to point out the weak and defective mechanism and 



426 CURRENT ECONOMIC PROBLEMS 

to claim that the competitive cash register had the same shortcom- 
ings. It also enabled him, in case the customer insisted upon pur- 
chasing the "knocker," to persuade the customer to purchase a gen- 
uine National machine when the "knocker," as was inevitable, speed- 
ily broke down. 

9. It instructed its sales agents secretly to weaken and injure 
the internal mechanism and to remove and destroy parts of competi- 
tive cash registers in actual use by purchasers whenever they could 
get their hands upon them. The object was evidently to cause the 
purchaser o-f a competitive cash register to become dissatisfied and 
to turn to the National to replace it. 

10. It threatened competitors and purchasers of competitors' 
machines with suits for infringement of the National's patent rights, 
when no such right existed, and no such suit was contemplated. 

11. In other cases it began suit against competitors and against 
purchasers of competitive cash registers for infringement when it 
was well known that there was no ground for such suits and when 
there was no intention of pressing the suits beyond the point neces- 
sary to harrass the competitors. 

12. It organized cash register manufacturing concerns and sales 
concerns ostensibly as competitors of itself, but in fact as convenient 
instruments for gaining the confidence and obtaining the secrets of 
competitors. 

13. It induced, by offers of largely increased compensation, the 
agents and employees of competitors to leave the employment of the 
competitors to enter that of the National. 

14. It applied for patents upon the cash registers of competitors 
and upon improvements upon those cash registers merely for the 
purpose of harrassing the competitors by interference suits and 
threats to institute such suits. 

211. The "Tieing" Agreement"^ 

BY W. H. S. STEVENS • 

Perhaps the most interesting of any of the methods of unfair 
competition is the requirement that, in order to obtain certain ar- 
ticles, a concern shall lease, sell, purchase, or use certain other ar- 
ticles. The successful imposition of such requirements is usually 
most destructive to competition ; and not infrequently it may be sup- 
pressed altogether. Though conditions of this character show va- 
riety, they may be discussed under three heads : 

^^Adapted from "Unfair Competition," in the Political Science Quarterly, 
XXIX, 291-299. Copyright (1914). 



CAPITALISTIC MONOPOLY 427 

1. The purchase or lease of articles upon which the patents 
have expired, as a condition of obtaining patented articles. 

The "tieing" clauses in the leases of the United Shoe Machinery 
Company furnish an example of this. A "tieing" clause may be 
described as a provision that a given machine must be used in con- 
junction with another or other machines. Sometimes the Shoe Ma- 
chinery Company leases together two patented articles. In certain 
other cases the leases have tied to patented machines others upon 
which the patents have expired. The effect of the latter type of 
clause was described by a witness before a congressional committee : 
"At the present time a very large proportion of the important basic 
patents have expired, and but for the restrictions imposed upon us 
by their leasing system we should today be exercising our undoubted 
right to use, without royalty, a large part of the machinery now 
employed." 

The Crown Cork & Seal Company, of Baltimore, manufactures 
more tin caps for bottles than does any other concern in the United 
States. The same concern also controls patents upon a certain de- 
vice known as the Jumbo capping machine. None of the machines 
is sold. They are leased to brewing and bottling establishments 
under agreements which provide that the "said machines shall be 
used only in connection with Crown corks purchased by the lessee 
directly from the lessor." The patents on the caps expired years 
ago. The lease attempts to compel bottlers to purchase all caps from 
the Crown Cork & Seal Company. 

The theory which underlies the grant of a monopoly in a patent 
is that human progress is promoted by the gift to inventors for a 
term of years of the exclusive property in their inventions. At the 
end of the period it is intended, however, that the inventions shall 
become the property of the public. Theoretically any concern may 
begin the production of an article previously patented as soon as the 
term of the patent expires. Actually it may be unable to do so. 
Conditional requirements may so destroy the market that even if the 
goods were produced there would be no customers to purchase. This 
precise situation seems to have developed through the "tieing" 
clauses of the Shoe Machinery Company applying to patents. 

2. The use of certain patented articles as a condition of obtain- 
ing other patented articles. 

The contracts of the Shoe Machinery Company require that a 
given patented machine must be used in conjunction with another 
patented machine. Under free competition the relative productive 
efficiency of various machines produced by various concerns would 
determine to a nicety the reward belonging to each patentee. As it 
is, a machine more efficient than the United's machine for the work 



428 CURRENT ECONOMIC PROBLEMS 

it is designed to perform might have no market and bring in no 
royalties to its patentee. A similar case is that of the Motion Pic- 
ture Patents Company, which, by virtue of its film control, has en- 
deavored to compel the use of motion pictures containing one or 
more of the patents which it controls. 

3. The purchasing, selling, or handling of a certain article or 
line of articles as the condition of the purchase or handling of an- 
other article or line of articles. 

The Commissioner of Corporations in his report on the Interna- 
tional Harvester Company has used the term "full-line forcing" to 
describe "the practice of requiring dealers to order new lines as a 
condition of retaining the agency for some brand of the company's 
harvesting machines." 

A restriction of similar character is charged by the government 
in its suit against the American Coal Products and Barrett Manu- 
facturing companies. These concerns are supposed to have a very 
substantial control of the pitch made from coal tar. Some pur- 
chasers and users of roofing materials have been required to buy 
one ton of felt to every two tons of pitch. 



212. Monopoly Control of Cost Goods^^ 

BY W. H. S. STEVENS 

Attempts to acquire the control of the machinery necessary to 
the manufacture of a particular line of goods are by no means un- 
known. Following its organization in 1890 the old American To- 
bacco Company, by securing and maintaining for some time the ex- 
clusive control of the most successful cigarette machinery, was en- 
abled to strengthen its dominant position in the business. At the 
time of its organization it acquired control of the Allison and the 
Emery machines, the patents of which belonged to firms entering the 
new combination. Soon afterward it made a contract for the ex- 
clusive use and control of the Bonsack machine. Thus it acquired 
control of the very best machines used in the production of cig- 
arettes. 

In 19 1 3 the government brought suit against the American Can 
Company. That concern was charged with acquiring control of the 
principal can-making machinery plants of the United States, together 
with most of the valuable patents for making that machinery. In 
some cases this result was accomplished through long-term contracts 

"^Adapted from "Unfair Competition," in the Political Science Quarterly, 
XXIX, 469-475. Copyright (1914). 



CAPITALISTIC MONOPOLY 429 

with patentees for controlling the disposition of the machinery man- 
ufactured under their patents ; in others by the purchase of licenses 
which the owners of the patents had issued to the manufacturers of 
cans ; in still others by obtaining contracts not to sell such machinery 
to other parties. 

Somewhat different are cases in which control is acquired of the 
articles or materials which enter into the manufacturing process. 
The greater part of the supply of raw paper used in the manufac- 
ture of photographic papers throughout the world is said to be in 
the hands of the General Paper Company of Germany. Prior to 
1906, when the control of this company was almost complete, the 
General Aristo Company, which is controlled by the Eastman Kodak 
Company, is alleged to have contracted to purchase the entire supply 
of raw paper exported by the General Paper Company to the United 
States. This contract, it is claimed, was continued from 1906 to 
1910. Testimony before the Industrial Commission is to the effect 
that the Photographic Supplies Combination first secured control of 
raw paper imported from Germany about the year 1899. 

The government has charged the Aluminum Company of Amer- 
ica with endeavoring to obtain such a control of the bauxite prop- 
erties of the United States as would prevent anyone but itself from 
producing metal aluminum. Prior to" 1905, the Aluminum Company 
of America possessed valuable bauxite properties, yet it did not ap- 
proach control of even 50 per cent of the total bauxite supply of the 
United States. In that year, however, the company through the 
General Chemical Company acquired the capital stock of the General 
Bauxite Company. As part consideration for this contract, the 
General Chemical Company agreed that it would not use or sell 
bauxite sold to it by the General Bauxite Company for conversion 
into metal aluminum, but would use it solely for the manufacture of 
alum, alum salts, alumina sulphate, and similar products. In 1909 a 
contract was made with the Norton Chemical Company for the pur- 
chase of the bauxite properties of the Republic Mining & Manufac- 
turing Company, whose capital stock was owned by the Norton 
company. In considering these contracts made by the Aluminum 
Company of America, it should be borne in mind that this organ- 
ization is alleged to control nearly one-half of the stock of the Alum- 
inum Castings Company, 37 per cent of the stock of the Aluminum 
Goods Manufacturing Company, and to be sole owner of the stock 
of the Northern Aluminum Company and the United States Alum- 
inum Company, manufacturers of aluminum cooking utensils. 



430 CURRENT ECONOMIC PROBLEMS 

E. THE GOVERNMENT AND MONOPOLY 
213. Law and the Forms o£ Combination^* 

BY bruce; wyman 

Notwithstanding all the law against agreements in restraint of 
trade, the present generation has seen the greatest movement toward 
consolidation which is recorded in economic history. But this was 
not accomplished without a reckoning with the law. In the face of 
adverse law the ingenuity of attorneys, acting for clients who wished 
to bring about a community of interests, has been taxed to the 
utmost; and at best their schemes have proved only temporary ex- 
pedients. In this era of consolidation there has been a change of 
base at least four times : first, the pool — a direct agreement between 
the corporations concerned for their joint operation to a certain ex- 
tent ; second, the trust — an indirect arrangement between the share- 
holders to control the actions of their corporations ; third, the holding 
company — a central company to hold the shares of the constituent 
companies ; and, fourth, the single corporation, which buys the prop- 
erties of the competing corporations outright. Yet, despite these 
various forms, the problem as to how various corporations may be 
concentrated under one control is still to a large extent unsolved. 

There was never real legal expectation of the success of any 
form of pooling. There was too much express authority against 
combinations in restraint of trade for that. 

Perhaps every member would live up to his agreement ; but there 
was no remedy at law if anyone did not. Perhaps the proceeds of 
the pooling would be fairly divided ; but the court would not order 
an accounting. And experience showed again and again that, with- 
out legal obligation, there were always members in any such pool 
treacherous enough to break it. Moreover, there was the corpora- 
tion law to reckon with which has always held it contrary to policy 
for corporations to surrender their independence by entering a pool. 
The courts have held that for no purpose, legal or illegal, could cor- 
porations be members of a partnership ; that they could not carry on 
their business in common.^^ 

It is further to be noted that when a combination in restraint of 
trade is once proved to be such, outlawry is declared. It can bring 
no suit against those in it; neither can they sue it. The courts will 
have nothing to do with either association or associates. This is the 
penalty, that the loss must lie where it falls; and this policy is in 

-^Adapted from Control of the Market, 142-164. Copyright by the author. 
Published by Moffat, Yard & Co. (1911). 

^'^Mills V. Upton, 10 Gray 582 ; Mallory v. Hanaiir Oil Works, 86 Tenn. 596. 



CAPITALISTIC MONOPOLY 431 

itself often one of the strongest of deterrents. Thus any member of 
the association may withdraw when it suits his interest to do so, a 
result that minimizes the harm that such a combination may effect. 
For experience shows that the result is that competition goes on sur- 
reptitiously, despite the agreement, since every active member is 
strengthening his position in preparation for an ultimate withdrawal. 
And at the psychological moment some member, who has accumu- 
lated a large stock while production has been curtailed, will sell out 
at near to the top price and break the market, thus causing his asso- 
ciates irreparable losses. 

Such was the state of the law when the trust agreement was dis- 
covered by a startled community. The features of this scheme are 
well known. All the shares of the capital stock of all the confeder- 
ating corporations are transferred to a board of trustees. These 
issue trust certificates in lieu of these shares, thus reserving the vot- 
ing rights in all the corporations. As a cover for the scheme all of 
the corporations remain in existence ; and in form each conducts 
its own business without any cross agreements among themselves. 

From the point of view of those who had on foot a scheme to 
monopolize, this trust device was excellent. It was centralized in 
its control and secret in its doings. It left the power of control with 
the inner circle, while enabling them to market as many securities 
as they pleased. But adverse court decisions robbed the agreement 
of its effectiveness.-^ It was held against the law governing corpora- 
tions in that it was beyond its powers for a company thus to surren- 
der its independence. It was also a void arrangement by the law 
against combinations in restraint of trade. The courts looked 
through the outer forms into the inner facts. This was fortunate 
for from the point of view of the state the scheme was almost be- 
yond control as its accounts could be juggled and responsibility for 
wrongdoing could not be fixed. 

A transition period of a few years followed upon the dissolution 
of the trusts. The original owners still had the properties ; and the 
common danger held them together, temporarily at least. Mean- 
while the lawyers were casting about for some new scheme for com- 
bining interests that would have legal sanction. The first schemes 
were rather obvious attempts to make use of some established ar- 
rangement as a cover for combination. Rather absurd these were, 
doomed to early exposure from the outset. What could not be done 
directly could not be brought about by indirection. The imperative 
need was a device that would stand the test of legality. It is true 
that without legal sanction much may be done under a gentleman's 

^People V. North River Sugar Refining Company, 121 N. Y. 582 ; State v. 
Standard Oil Company, 49 Ohio St. 137. 



432 CURRENT ECONOMIC PROBLEMS 

agreement ; but without legality in organization there is no security. 
Nor can there be any permanence unless the arrangement is perpet- 
ual. And, further, without security and permanence, there can be 
no issue of securities or market for them. 

Eventually there was evolved the idea of a holding corporation, 
a new central body which should acquire a majority of the stocks of 
the constituent companies. The holding company possessed possi- 
bilities of manipulation pleasant to contemplate; the marketable is- 
sues could be doubled by making the stock of the holding corporation 
twice that of the constituent companies ; and since the operation of 
the business could be concealed between the accounts of the holding 
company and the constituent companies, there would be nothing to 
fear from the publication of formal statements. 

There were obviously legal difficulties. In most states by the 
common law it was beyond the powers of one corporation to hold 
the stock of another for the purpose of operation. In some states, 
however, statute law or special charter permitted corporations to be 
organized to hold the stocks of other corporations. But this was at 
best a solution of only one of the difficulties ; another remained. 
Granted that the corporation was enabled to act without violation 
of the corporation law, there was the anti-trust law still to reckon 
with. 

So it came to be recognized that there was a safer way, if one 
chose to take it. The approved form among lawyers during the last 
few years for making a consolidation of interests is by the formation 
of a single gigantic corporation intended to take over by purchase all 
the different concerns that are to be brought together. It has been 
ruled that "corporations are empowered to purchase, hold, and use 
property appropriate to their business. Under such powers it is 
obvious that a corporation may purchase the plant and business of 
competing individuals and concerns."-'^ But this is not unquestioned 
law by any means. A court of equal authority has said, "There is 
no magic in a corporate organization which can purge the trust 
scheme of its illegality, and it remains as essentially opposed to the 
principles of sound public policy as when the trust was in existence. 
It was illegal before and is illegal still, and for the same reasons." 

From step to step in this succession there is a movement toward 
integration. Now that the end of economic evolution has been 
reached in a single corporation, the law against combinations in re- 
straint of trade may perhaps cease to operate. Now the state may 
impose such special regulation upon these industrial concerns as the 
situation requires. The problem is therefore much simplified since 
the time of the trusts. It has been reduced to its lowest terms by 

^''Trenton Potteries Company v. Oliphant, 58 N. J. Eq. 507. 



CAPITALISTIC MONOPOLY 433 

the activity of the law in insisting that all combinations of every 
stripe should be destroyed. The question then emerges, Shall these 
great corporations be destroyed or shall they be regulated? That, 
it is submitted, is the trust problem in its latest phase. 

214. — The Sherman Anti-Trust Act^^ 

Section i. Every contract, combination in the form of trust or 
otherwise, or conspiracy, in restraint of trade or commerce among 
the several states, or with foreign nations, is hereby declared to 
be illegal. Every person who' shall make any such contract or en- 
gage in any such combination or conspiracy, shall be deemed guilty 
of a misdemeanor, and, on conviction thereof, shall be punished 
by fine not exceeding five thousand dollars, or by imprisonment 
not exceeding one year, or by both said punishments, in the dis- 
cretion of the court. 

Section 2. Every person who shall monopolize, or attempt to 
monopolize, or combine or conspire with any other person or per- 
sons, toi monopolize any part of the trade or commerce among the 
several states, or with foreign nations, shall be deemed guilty of 
a misdemeanor, and, on conviction thereof, shall be punished by 
fine not exceeding five thousand dollars, or by imprisonment not ex- 
ceeding one year, or by both said punishments, in the discretion of 
the court. 

Section 3. Every contract, combination in the form of trust or 
otherwise, or conspiracy, in restraint of trade or commerce in any 
territory of the United States or in the District of Columbia, or in 
restraint of trade or commerce between any such territory and an- 
other, or between any such territory or territories and any state or 
states or the District of Columbia, or with foreign nations, or be- 
tween the District of Columbia and any state or states or foreign 
nations, is hereby declared illegal. Every person who shall make 
any such contract or engage in any such combination or conspiracy 
shall be deemed guilty of a misdemeanor, and, on conviction thereof, 
shall be punished by fine not exceeding five thousand dollars, or by 
imprisonment not exceeding one year, or by both said punishments, 
in the discretion of the court. 

Section 7. Any person who shall be injured in his business or 
property by any other person or corporation by reason of anything 
forbidden or declared to be unlawful by this act, may sue therefor 
in any circuit court of the United States in the district in which the 

^^From 26 U. S. Statutes 209 (1900). There are eight sections. The 
five sections given here form the essential part. 



434 CURRENT ECONOMIC PROBLEMS 

defendant resides or is found, without respect to the amount in con- 
troversy, and shall recover threefold the damages by him sustained, 
and the costs of the suit, including a reasonable attorney's fee. 

Section 8. That the word "person" or "persons," wherever 
used in this act, shall be deemed to include corporations and asso- 
ciations existing under or authorized by the laws of the United 
States, the laws of any of the territories, the laws of any state, or 
the laws of any foreign country. 

215. The Meaning of Restraint of Trade^^ 

In substance, the propositions urged by the Government are 
reducible to this: That the language of the statute embraces every 
contract, combination, etc., in restraint of trade, and hence its text 
leaves no room for the exercise of judgment, but simply imposes 
the plain duty of applying its prohibitions to every case within its 
literal language. The error involved lies in assuming the matter 
to be decided. This is true because, as the acts which may come 
under the classes stated in the first section and the restraint of trade 
to which that section applies are not specifically enumerated or de- 
fined, it is obvious that judgment must in every case be called into 
play in order tO' determine whether a particular act is embraced 
within the statutory classes and whether, if the act is within such 
classes, its nature or effect causes it tO' be a restraint of trade within 
the intendment of the act. To hold toi the contrary would require 
the conclusion either that every contract, act, or combination of any 
kind or nature, whether it operated a restraint on trade or not, was 
within the statute, and thus the statute would be destructive of all 
right to contract or agree or combine in any respect whatever as to 
subjects embraced in interstate trade or commerce, or if this con- 
clusion were not reached, then the contention would require it to 
be held that as the statute did not define the things tO' which it re- 
lated and excluded resort to the only mieans to which the acts to 
which it relates could be ascertained — the light of reason — the en- 
forcement of the statute was impossible because of its uncertainty. 
The merely generic enumeration which the statute makes of the 
acts to which it refers and the absence of any definition of restraint 

""Adapted from the opinion of the court in the case of The Standard Oil 
Company of New Jersey v. United States, 221 U. S. i (1911). By this decision 
the Standard Oil Company of New Jersey was ordered "dissolved." The 
significance of the decision lies in the distinction made by the court between 
"reasonable" and "unreasonable" restraint of trade, and the insistence that 
the Sherman act was meant to apply to the latter exclusively. This is the 
subject of discussion in the selection given here. The Standard, of course, 
was found guilty of "unreasonable" restraint of trade. 



CAPITALISTIC MONOPOLY 435 

of trade as used in the statute leaves room for but one conclusion, 
which is that it was expressly designed not to unduly limit the ap- 
plication of the act by precise definition, but while clearly fixing a 
standard — that is, by defining the ulterior boundaries which could 
not be transgressed with impunity — ^to^ leave it to be determined by 
the light of reason, guided by the principles of law and the duty 
to apply and enforce the public policy embodied in the statute in 
every given case, whether any particular act or contract was within 
the contemplation of the statute. 

216. Dissolution of the Standard Oil Company 

Standard Oil Company (of New Jersey) 
26 Broadway, 

New York, July 28, 191 1. 
To the Stockholders of the 

Standard Oil Company (of New Jersey) : 

Obedience to the final Decree in the case of the United States 
against the Standard Oil Company (of New Jersey), and others, 
requires this Company, to distribute, or cause to be distributed, 
ratably, to its stockholders the shares of stock of the following cor- 
porations, which it owns directly or through its ownership oi stock 
of the National Transit Company, to wit : Anglo-American Oil Com- 
pany, Limited ; The Atlantic Refining Company ; Borne-Scrymser 
Company; The Buckeye Pipe Line Company; Chesebrough Manu- 
facturing Company, Consolidated; Colonial Oil Company; Con- 
tinental Oil Company ; The Crescent Pipe Line Company ; Cumber- 
land Pipe Line Company, Incorporated; The Eureka Pipe Line 
Company ; Galena-Signal Oil Company ; Indiana Pipe Line Com- 
pany ; National Transit Company ; New York Transit Company ; 
Northern Pipe Line Company ; The Ohio Oil Company ; The Prairie 
Oil and Gas Company; The Solar Refining Company; Southern 
Pipe Line Company ; South Penn Oil Company ; South West Penn- 
sylvania Pipe Lines; Standard Oil Company (California); Stand- 
ard Oil Company (Indiana) ; The Standard Oil Company (Kan- 
sas) ; Standard Oil Company (Kentucky) ; Standard Oil Company 
(Nebraska) ; Standard Oil Company of New York; The Standard 
Oil Company ( Ohio) ; Swan & Finch Company ; Union Tank Line 
Company ; Vacuum Oil Company ; Washington Oil Company ; 
Waters-Pierce Oil Company. 

Such distribution will be made to the stockholders of the Stand- 
ard Oil Company (of New Jersey) of record on the ist day of 



436 CURRENT ECONOMIC PROBLEMS 

September, 191 1; and, for that purpo'se, the transfer books of the 
Company will be closed on the 31st day of August, 191 1, at 3 o'clock 
P. M., and kept closed until the date when said stocks are ready 
for distribution, which it is expected will be about December i, 
1911. 

Notice of the date when said stocks are to be distributed and of 
the re-opening of the books will be duly given. 

Yours very truly, 

H. C. Folger, Jr., 

Secretary. 

217, The Result of the Dissolutions^" 

BY ARTHUR JEROME EDDY 

Everybody knows what disintegration means, it means disso- 
lution — '"smashing 'em," in the language of the street. 

The Standard Oil Company has been disintegrated into some 
thirty-five, more or less — chiefly less — independent and supposedly 
competing companies. 

The Tobacco Company has been disintegrated into fourteen, 
more or less, independent and — supposedly — competing units. 

The net result to the public so far has been higher prices for 
many of the products of the one and no lower prices for any of 
the products of the other. 

The net result to many small stockholders has been losses. 

The net result to "insiders" — the men against whom public 
clamor was raised— has been golden opportunities for profit in the 
buying and selling oi subsidiary stocks long before stockholders 
and the public could possibly form any accurate notions of their 
real value. 

To illustrate — when the Standard Oil Company of New Jersey 
— the trust — was dissolved by order of court the stockholders of 
that company received pro^ rata fractional interests in all the sub- 
sidiary companies, and for the first time thousands of men and 
women all over the country learned of the existence of those thirty- 
five companies. By no possibility could these scattered stockholders 
form accurate opinions regarding the values of the fractional shares 
issued to them; only the men in control of the industry were in a 
position to know. What has been the result? The stockholders 
and public have sold and bought in ignorance, losing both ways. 

''"Adapted from The New Competition, 258-260. Copyright by D. Apple- 
ton & Co. (1Q12). 



CAPITALISTIC MONOPOLY 437 

Take the Standard Oil Company of Indiana, one of the subsidiary 
companies. It was capitaHzed at $1,000,000; the amount cut no 
figure so long as all its stock was held by the trust, but when the 
trust was dissolved its many stockholders received each his frac- 
tional pro rata share in the Indiana Company. There was a gen- 
eral impression the stock of this company was worth far more 
than par, but how much? Only the insiders could tell. As a result 
many stockholders who were in the dark sold their interests at less 
than a fifth of what the stock sold for inside a few weeks. 

A few days ago the Indiana Company voted to increase its cap- 
ital stock from one million dollars to thirty millions and to distribute 
the $29,000,000 to its stockhoilders as a stock dividend, and it now 
appears that the company is earning at least ten millions a year, or 
33 1/3 P^^ cent on the new capitalization, but it is stated in the 
press the "officers refuse to give any info^rmiation on this point." 

Disintegration of trusts and large corporations simply because 
they are large is a senseless proposition, because both are here to 
stay in some form. The Sherman Law was passed in 1890. For 
more than ten years few attempts were made to enforce it against 
large corporations. Then, in response to popular clamor, due to 
many flagrant abuses, came a period of indiscriminate "trust-bust- 
ing." Already there are signs of reaction ; the pendulum is swing- 
ing back; it is found the Sherman Law hits large and small, good 
and bad, labor unions and capital unions alike. 

218. An Appraisal of the Sherman Act^^ 

BY ALLYN A. YOUNG 

The Sherman act is a general statute, declaratory of public 
policy. As such it must be judged by (i) the soundness of the 
policy which it declares, (2) the accuracy and completeness with 
which it declares that public policy, and (3) the adequacy of the 
mechanism which it provides for making that policy effective. 

I. There can be little doubt that the public policy which the 
act was intended to embody is that competition should be maintained, 
artificial monopoly destroyed, and its growth prevented. It is clear 
from the debates attending its enactment that its hostility toward 
large industrial combinations was especially directed against (i) 
their supposed power over prices and (2) their aggressive sup- 
pression of competition. Whatever the economic advantages of 

^^Adapted from "The Sherman Act and the New Anti-Trust Legislation," 
in the Journal of Political Economy, XXIII, 213-220 (1915). 



438 CURRENT ECONOMIC PROBLEMS 

monopoly may be, there will be little question of the soundness of 
the policy which attempts to deprive it of its power for evil in these 
two particulars.^" 

2. Is the Sherman act an accurate expression of the public pol- 
icy which it seeks to declare? If by accuracy is meant precision, it 
has little of it. It was, in its inception, a lawyer's statute, speaking 
in the language of the common law. At the time it was evident that 
it would be difficult for Congress to come to an agreement on par- 
ticulars. Moreover, its general phrases were chosen intentionally, 
we are told by one of its framers, in order that the responsibility of 
determining its exact scope might be left to the courts. For seven 
years its interpretation was uncertain. The decisions of the lower 
court were conflicting, and the Supreme Court's holdings purely 
negative. Even after an utterance from this court, the words "re- 
straint of trade" still remained to be defined, and in the next thirteen 
years the work of definition progressed only so far as the particular 
cases decided were typical of the classes of cases possible. The 
standard of public policy outlined in the Standard Oil decision was 
the first general criterion of the scope of the act. There is little 
doubt that the present interpretation of the statute is in harmony 
with the purposes which were in mind at the time of its enactment. 
There is now no question that if the purposes of combination are 
monopoly, they come within the condemnation of the act. There 
is no reason to think, for example, that price agreements and agree- 
m.cnts to restrict output, whether of local or general scope, are not 
as illegal now as they have been at any time. 

As a general expression of the public policy which it is supposed 
to embody the Sherman act is adequate. The difficulty is that it 
goes too far. 'In the first place, it is so worded that it is used as 
a weapon against strikes, boycotts, and other concerted efforts to 

*^Most of the more weighty discussions of the economic advantages of 
monopoly have to do with the effect of monopoly upon the aggregate produc- 
tion of wealth measured in terms either of subjective satisfaction or of objec- 
tive commodity units. Even from this point of view the case for monopoly 
is exceedingly dubious and, at best, has a validity that is restricted and con- 
ditioned in many ways. Moreover such considerations are relatively unim- 
portant compared with matters like the effect of monopoly upon distribu- 
tion, upon the scope for individual initiative, upon economic opportunity in 
general, and upon a host of social and political relations. In short, it is a 
question less of the relative "economy" of monopoly or competition than of 
the kind of economic organization best calculated to give us the kind of 
society we want. Until our general social ideals are radically changed, it 
will take more than economic analysis to prove that it would be sound public 
policy to permit monopoly in that part of the industrial field where compe- 
tition is possible. 



CAPITALISTIC MONOPOLY 439 

interfere with the conduct of any business undertaking which ships 
its goods across state Hnes or to other countries. These things may 
be undesirable; very Hkely some of them are. But they are so far 
out of Hne with the other things condemned by the Sherman act, 
and in most instances have so Httle relation to "monopolizing" that 
they should be cut from the list of offenses condemned by the act. 
In the second place, the application of the Sherman act to railroads 
is inconsistent with the standards of public policy embodied in the 
Interstate Commerce act. We regulate railroad rates and services 
on the assumption that railroads are natural monopolies, and that 
combinations or rate agreements are inevitable. But at the same 
time we condemn railroad combinations and rate agreements, and, 
as in the New Haven case, bring criminal indictments against the 
men responsible for such combinations. From railroads we exact 
the observance of two mutually inconsistent standards of morality. 
The real evils in railway combinations are matters of corporation 
finance. These should be dealt with by statutes appropriate to the 
purpose; and the Sherman act should be so amended as to be rele- 
gated to its proper field of preventable industrial monopolizing. 

Finally, there comes the question of whether even within the 
industrial field we want to prohibit monopoly as well as aggressive 
monopolizing. Probably a monopoly achieved merely by the su- 
perior efficacy of a formerly competitive business unit (if such were 
possible) would not be condemned by the courts as a violation of 
the Sherman act. And what is the status of a monopoly built up 
merely by the peaceful union of absorption of competitive units? 
In such a case on which side public policy lies it is hard to determine. 

3. Does the Sherman act provide an efficient mechanism for 
achieving its own ends? That its criminal features have been rela- 
tively ineffective is generally admitted. Furthermore, it has been 
found in practice that it is very difficult to secure a criminal convic- 
tion from a jury for an offense so general, so abstract, so tainted 
with the general and customary imputation of immorality as "re- 
straint of trade" or "monopolizing." There is no reason to believe 
that it will ever be easy to secure convictions for restraint of trade 
in cases where the several steps taken in the creation of the restraint 
are unobjectionable except as a part of a general scheme. As it is 
the statute provides only an indirect and uncertain way of penalizing 
unfair competitive methods. I see no reason why the criminal rem- 
edies of the Sherman act should be retained. 



440 CURRENT ECONOMIC PROBLEMS 

The proceedings in equity for the dissolution of a combination 
have, on the contrary, proved to be increasingly effective. It is con- 
tended by many that the enforced dissolution of a combination 
means generally a mere change in form ; that we are merely hunting 
the quarry from tree to tree. But neither in transportation nor in 
industry does it clearly appear that the newer and more unified forms 
of consolidation would not have largely displaced the old, even if 
the movement had not been hastened by legislations and decisions 
under the common law. Among other things tending to this end 
are the various strategic advantages of the consolidated unit, and 
the permanency and dependability of the newer forms of combina- 
tion, making possible the adoption of business policies based on long- 
time considerations. It is more than possible that after a long chase 
the quarry has at last been driven into a corner. 

Is it proved that the mere dissolution of industrial combination 
accomplishes anything, especially in cases where the equities in the 
combination are made the basis of a pro rata distribution of the 
equities in its constituent parts ? Only a few general conclusions 
can be stated: (i) The results must vary with the nature of the 
business and the degree to which the aggressive suppression of com- 
petition played a part in maintaining competitive conditions. (2) 
Dissolution rarely comes early enough — -not until the monopolistic 
situation has become more or less crystallized. (3) The operation 
of the statute is intermittent. Dissolution should be carefully fol- 
lowed up, and every step in the process of restoring normal condi- 
tions should be carefully watched. This requires administrative 
machinery. 

In its own field the Sherman act has a value all its own. No 
matter how carefully drawn the rules of the game may be, no mat- 
ter how high the level set by the law of competition, new business 
conditions are bound to arise, not covered by specific statutes, and 
yet contrary to the generally accepted public policy of the main- 
tenance of competition within its own proper field. The Sherman 
law, as a general declaration of public policy, has an elasticity and 
adaptability to new situations of all kinds not possible to legislation 
of a more specific sort. Its declaration of public policy is general 
enough so that it may gradually grow in meaning and change in ap- 
plication through judicial decision as the common law has grown 
and changed. So long as the preservation of competition in that 
large part of the industrial field in which it is feasible is public 
policy, why should we not, through such a statute, continue to give 



CAPITALISTIC MONOPOLY 441 

the federal courts jurisdiction in cases involving the assertion of 
that public policy ? But it needs amendment in the ways which have 
been indicated. 

2ig. Provisions of the Clayton Act^^ 

The Clayton act provides : 

A. That it shall be unlawful for any person engaged in com- 
merce to make discriminations in prices between different purchasers 
of commodities sold for use, consumption, or resale, where the effect 
of the discrimination may be substantially to lessen competition or 
tend to the creation of a monopoly. 

B. That it shall be unlawful for any person engaged in com- 
merce to lease, sell, or contract for the sale of goods, patented or un- 
patented, or to fix a price charged therefor, or discount, or rebate, 
upon such price, conditioned upon the lessee or purchaser thereof, 
not using or dealing in goods, of competitors of the lessor or seller, 
where the effect may be substantially to lessen competition, or tend 
to create a monopoly. 

C. That no corporation shall acquire the whole or any part of 
the stock or other share capital of another corporation, or two or 
more corporations, where the effect may be substantially to lessen 
competition, to restrain commerce, or to tend to create a monopoly. 

D. From and after two years from the date of the approval of 
the act : 

1. No person shall be a director or other officer or employee of 
more than one bank organized under the laws of the United States 
if any one of them is above a certain size ; and no private banker or 
person who is director in any bank or trust company organized 
under the laws of any state, and above a certain size, shall be eligible 
as a director of any bank or banking association incorporated or 
operating under the laws of the United States. 

2. No bank organized or operating under the laws of the 
United States in any city, incorporated town, or village, of more than 
200,000 inhabitants, shall have as director or officer or employee any 
private banker or any director or any other officer or employee of 
any other bank located in the same place. 

3. No person shall be a director at the same time in any two or 
more corporations (other than banks and common carriers) engaged 
in interstate commerce, any one of which has capital, surplus, and 

^''Only a few of the provisions of the law are given, and these, because 
of their great length, are presented in summary form. The adaptation is 
that of W. H. S. Stevens, in "The Clayton Act," in the American Economic 
Review, V, 40-41. Copyright (1915). 



442 CURRENT ECONOMIC PROBLEMS 

undivided profits aggregating more than $1,000,000, if such cor- 
porations have been competitors so that the eHmination of compe- 
tition between them will constitute a violation of any of the pro- 
visions of the anti-trust laws. 

220. The Trade Commission and Clayton Acts^* 

BY W. H. S. STEVENS 

Two acts have recently been passed making important changes 
in the federal law as it applies to trusts and combinations. These 
measures are generally known as the Trade Commission Act and the 
Clayton Act.^^ With reference to this legislation the following con- 
clusions may be drawn : 

1. The Trade Commission is a body with wide powers of in- 
vestigation and limited administrative authority. 

2. Several of its investigatory powers have to a noticeable de- 
gree been previously exercised by the Bureau of Corporations or 
the Department of Justice. But the investigatory authority of the 
commission is considerably greater than that possessed in the past 
by both of these other agencies. 

3. The commission is given powers of making recommenda- 
tions to the Attorney-General for the readjustment of the business 
of corporations violating the anti-trust acts and also of ascertaining 
and reporting appropriate decrees in equity suits brought by or un- 
der the Attorney-General. But the exercise of these functions de- 
pends in the first place upon the application of the Attorney-General 
and in the second case upon the reference of the suit by the courts 
to the commission. 

4. The Trade Commission act gave the commission a most im- 
portant administrative authority in providing that the body should 
prevent unfair methods of competition. The Clayton measure fur- 
ther extended this authority in giving it jurisdiction to enforce the 
prohibitions against holding companies and interlocking directo- 
rates. It also gave it jurisdiction to prevent price discriminations 
and exclusive and tieing agreements. 

5. The enforcement of the principal prohibitions of the Clay- 
ton act and of the unfair competition section of the Trade Commis- 
sion act is entrusted to the commission by the following method of 
procedure. The commission conducts a hearing and makes an order 
against a practice, a review of which may be had by the party 

^* Adapted from "The Clayton Act," in the American Economic Review, 
V, 51-54- Copyright (191S)- 

^^The former measure became a law when the President attached his sig- 
nature to it September 26, 1914, and the latter on October 16, 1914. 



CAPITALISTIC MONOPOLY 443 

against whom it is made in the Circuit Court of Appeals. If the 
order is not obeyed the commission apphes to the same court for 
enforcement, and the jurisdiction of the court in both cases is ex- 
clusive and final. 

6. A concurrent justification has been vested in the district 
courts to enforce the prohibitions against price discriminations, ex- 
clusive and tieing agreements, holding corporations, and interlock- 
ing directorates. Thus it is to be noted that there are two courts of 
appeal : the Circuit Court of Appeals when the Trade Commission 
makes orders against these practices, the Supreme Court when the 
district court enjoins them. 

7. The new laws rely primarily upon contempt proceedings and 
the penalties therefor in enforcing their prohibitions. 

8. The elimination of the criminal penalties from several sec- 
tions of the Clayton act and the lack of any such provisions as 
punishment for unfair methods of competition clearly point to civil 
rather than criminal procedure as the remedy to be invoked in cases 
of violation of the principal prohibitions of the new legislation. 
This, coupled with the fact that the new laws provide for a Trade 

■ Commission with jurisdiction over the important prohibitions, points 
to a policy of administrative regulation of the trusts. 

9. The powers given to the Trade Commission of classifying 
corporations and prescribing the form of reports are pregnant with 
possibilities. Through these powers it would appear possible for the 
Trade Commission to determine with some correctness the relative 
economic efficiency of competition on the one hand and combina- 
tion and monopoly on the other. Even if no such broad deter- 
mination can be arrived at for industry in general, it ought at least 
to be able to learn in what types and kinds of business the one or 
the other principle is the more efficient. 

10. There are provisions in the new legislation in the direction 
of enabling individuals to protect themselves against loss or damage 
by reason of violations or threatened violations of the anti-trust 
acts. This embraces among other things a re-enactment, now ap- 
plied to violations of any of the anti-trust acts, of the threefold dam- 
age clause of the Sherman act. 

221. Ultimate Results of Regulating Combinations^® 

BY E. DANA DURAND 

Few of those who have advocated the policy of permitting com- 
binations to exist subject to regulation seem to have given thought 

'"Adapted from The Trust Problem, 46-59. Copyright by Harvard Uni- 
versity (1914). 



444 CURRENT ECONOMIC PROBLEMS 

to the magnitude of the task, its difficulties, or its ultimate outcome. 
They have had in mind the comparatively few closely knit trusts of 
the present time; the so-called "good trusts" with their alleged 
superior efficiency and their more or less reasonable policy toward 
the public. 

In the first place it would be difficult to limit the number of 
trusts under such a policy. It is, of course, conceivable that the 
government should undertake to suppress combinations in general 
while permitting a few trusts to exist. A limited number might be 
tolerated because of the special economic characteristics of the in- 
dustries concerned which tended to make combination particularly 
economical. If, however, the people once concede the right of a 
monopolistic combination to exist, independently of extraordinary 
conditions, a sense of justice should apparently compel them to per- 
mit combinations ad libitum. Under no theory of justice could all 
the trusts heretofore organized be permitted to continue without 
granting permission to organize trusts in every other field. 

In the second place, it would seem that if combinations having 
power to restrain trade are to be permitted at all, they must be per- 
mitted to become as comprehensive as they desire. Why should a 
combination not be allowed to take over lOO per cent of the busi- 
ness in its field quite as readily as 80 or 70 per cent? Few desire 
to prohibit combinations controlling only a small proportion of a 
given industry ; but if we permit that limit to be overstepped at all, 
there is no limit. One can only speculate upon how numerous and 
how comprehensive the trusts and pools would become if the policy 
were adopted of permitting them freely but subjecting them to regu- 
lation. In all probability the number would become very great. Be- 
yond question every combination, unless prevented by the govern- 
ment, would take in just as large a proportion of the trade as could 
be persuaded to enter it. In many cases this would mean the entire 
trade. 

If corporations were freely permitted and no limit placed upon 
their magnitude, neither actual nor potential competition would be 
an adequate check upon prices and charges for service. Govern- 
ment regulation would unquestionably be necessary. 

Some have suggested that regulation would be comparatively 
simple. Only bad trusts would be interfered with, and the fear of 
government intervention would make most of the trusts good. The 
government, some seem to think, could let the trust go its own way 
until it was proved to have become extortionate or to have used un- 
fair methods, and could then step in and punish its officers, or sus- 



CAPITALISTIC MONOPOLY 445 

pend its right to do business. But how is the trust manager to know 
in advance what prices and what practices will be adjudged so un- 
reasonable as to call for criminal prosecution? What advantage 
would there be in breaking up a trust, if another trust could be' 
formed in its place the next day? It would be intolerable to the 
users of its products and services to stop its business even tem- 
porarily. A good trust may become a bad trust overnight. Shall it 
be a lawful organization today and an outlawed wreck tomorrow? 
Regulation implies continuity of the combinations. Even if the 
government adopted the policy of punishing trust managers as a 
penalty for extortionate prices and unfair practices, this would re- 
quire as thorough an investigation and as difficult a judgment as to 
determine the proper prices and practices for the future. 

In its very essence, however, regulation implies, not punishment 
of past action, but prescription of future action. This means that 
the government, if it undertakes regulation of trusts, will ultimately 
have to fix their prices or limit their profits, or both. There is no 
way to insure reasonable prices under monopoly control, but to re- 
strict them. If the government enters upon this policy ought it not 
to go a step further and guarantee to the combination a permanent 
monopoly, protecting them against competition? The public is 
coming to accept the view that justice to investors in public service 
industries demands protection against competition. If the investor 
in trust securities has had his profits held down by government regu- 
lation, it is hardly fair to permit those profits to be still further low- 
ered, perhaps wholly destroyed, by the advent of a competitor. 

Whatever might be the outcome of government regulation, there 
can be no doubt of the immense difficulty of just and efficient regu- 
lation of the prices or the profits of industrial combinations. The 
federal government and the states would have to maintain elaborate 
and powerful machinery to control the combinations. Consider the 
nature of the task which would confront an administrative body. In 
the first place, it would have to possess at all times detailed informa- 
tion regarding all the concerns under its jurisdiction. The prices of 
many commodities are necessarily variable. The cost of material 
may change greatly and rapidly. The conditions of demand are 
changeable. Grave injury might be done to the public during the 
time required for securing information on which to base action if 
such information were not already in the possession of the regu- 
lating authority. 

In the second place, the amount of detail involved would be 
enormous. A proper fixing of prices would require complete 



446 CURRENT ECONOMIC PROBLEMS 

knowledge of the costs of production and of the amount of invest- 
ment. To make information accurate, the government would have 
to prescribe the methods of accounting. It would be impossible to 
prescribe uniform methods as is done for the railroads. The be- 
wildering variety of conditions in the different industries would have 
to be provided for. Detailed reports, based on these prescribed 
methods, would have to be made to the government, and these would 
have to be scrutinized and studied with the utmost care. The gov- 
ernment would have to employ a vast corps of expert accountants, 
statisticians, and other specialists. The difficulties of cost account- 
ing are so great that many of the large business concerns have found 
it impossible to ascertain the costs of their products on scientific 
principles. The business concern can get along without accurate 
knowledge of its own costs. The government, however, in fixing 
prices, must know all about cost, both operating costs and capital 
charges. They are the very things which primarily determine the 
reasonableness of prices. 

In the third place, the determination of costs and investments 
for the purpose of fixing prices would involve immensely difficult 
problems of judgment. The judgment of the regulating body would 
be constantly challenged and the result would probably be endless 
litigation. The proper allowance for depreciation and obsolescence, 
the proper apportionment of overhead charges among different 
products and services, the proper methods of valuing the different 
elements in investment — these would have to be passed upon by the 
regulating authority. Such problems are difficult enough as they 
confront the Interstate Commerce Commission. They would be far 
more difficult for a body dealing with multifarious combinations in 
widely differing industries. 

Even if the regulating authority should succeed in working out a 
satisfactory determination of costs of production and value of in- 
vestment, it would still be beset with troubles in fixing prices or 
limiting profits. Demand for goods is variable even in non-com- 
petitive industries. Unchanging prices or prices bearing an un- 
changing relation to costs would not be practical in mining, manu- 
facturing, and mercantile business. A combination might at times 
be justified in reducing prices below a normal level to stimulate de- 
mand and keep its force employed, or to meet foreign competition. 
The government would then have to determine how much prices 
could subsequently be advanced in order to offset these reductions. 
In other words, the government would be dealing with a constantly 
changing problem of demand. Particularly difficult would be the 



CAPITALISTIC MONOPOLY 447 

fixing of proper prices for products produced at joint cost. Take 
petroleum for example. A wide variety of products are derived 
from the one raw material, crude oil. Some of these are in so 
little demand that they must be sold for less than the price of the 
crude oil itself. Others are in great demand and can be sold for 
high prices. It is impossible to use costs as a basis for determining 
prices of the specific products. For a regulating body to determine 
the proper relationships of the prices of these joint products is vir- 
tually impossible. 

One could continue almost indefinitely setting forth the com- 
plexities and difficulties of government regulation of the prices and 
profits of combinations. A vague form of regulation will not do. 
It would be difficult to prove that the public would be any better off 
under a regime of half -regulated monopoly than under a 
regime of competition enforced as well as possible by laws 
against combinations and monopolies. Combination must be proved 
decidedly more efficient than competition before the people will be 
justified in trusting trusts under any but the most rigorous govern- 
ment control. 

Government regulation of prices and profits always involves a 
large element of waste, of duplication of energy and cost. It means 
that two sets of persons are concerning themselves with the same 
work. The managers and employees of the corporation must study 
cost accounting and conditions of demand in determining price pol- 
icy. The officers and employees of the government must follow and 
do it all over again. Moreover, the fact that the two sets of persons 
have different motives in approaching their work means friction and 
litigation, and these spell further expense. To superimpose a vast 
governmental machinery upon the vast machinery of private busi- 
ness is an extravagance which should be avoided if it is possible to 
do so. 

The policy of government regulation of industry may readily be- 
come a stepping-stone to government ownership and socialism. The 
chances are strong that the government of the United States will 
take over the telegraphs and telephones in the near future and the 
railroads within less than a quarter of a century. If regulation by 
the government proves ineffective in securing reasonable rates, the 
general public will demand government ownership. If regulation 
proves so effective as to leave only moderate returns to the stock- 
holders of the corporations, the stockholders are likely to urge gov- 
ernment purchase, which would at least assure them a more cer- 
tain income. In either case the excessive cost of government regu- 
lation will be urged as a reason for government ownership. In the 



448 CURRENT ECONOMIC PROBLEMS 

same way, if the government undertakes detailed regulation of com- 
binations in manufacturing, mining, and trade, there is bound to be 
a strong movement for government ownership in these fields also. 

Government ownership of this or that industry is not necessarily 
a bad thing. Even government ownership of a large proportion of 
the industries of the country, even complete socialism, need not 
necessarily affright us. It is sufficient to point out that the people 
ought not to enter on the path of permitting and regulating com- 
binations without considering the advantages and disadvantages of 
this, the possible ultimate outcome, as well as those of the immedi- 
ate policy itself. If it could be proved that combination is materially 
more economical than competition, we should doubtless be wise to 
say farewell to competition. Presumably in this case we ought to 
test thoroughly the practicability of government regulation of private 
monopoly before proceeding further. The people would naturally 
first try the plan of government ownership, if at all, in limited fields, 
and compare the results with those of regulated monopoly before 
undertaking general government ownership. It is by no means 
improbable that the ultimate outcome would be socialism. The 
future is very likely to see either a regime of general competition 
— with, of course, some special exceptions — or a regime of universal 
communism. Clearly, then, we should be very sure of our ground 
before we take the first step toward possible communism. We 
should convince ourselves beyond all doubt that competition is im- 
possible ; or that, if possible, it is less efficient than monopoly — not 
merely at certain times and in certain places, but generally and 
permanently — before we tolerate widespread combination in the 
field of business. 



I 



IX 

THE PROBLEMS OF POPULATION 

It is generally agreed to be desirable to use our powers of social control 
to eliminate, or greatly reduce, the grosser social evils, such as misery, poverty, 
vice, and crime. Perhaps the great majority of us would go farther, and use 
such powers m quite a positive way to make society conform more closely 
to our ideals. But we differ, as "reformers" have always done, as to 
methods. In general we belong to two schools, the one stressing control of 
"environment," the other control of "population." The former demands 
greater equality in the distribution of income, a bettering of living and work- 
ing conditions, a state relief of the stress due to "economic insecurity," and 
like measures. The latter variously insists upon the reduction of numbers 
through ^"control of births," the restriction of immigration, and a "scientific 
breeding" of a "superior race" from the "eugenically fit." Some of the latter 
school emphasize quantitative, others qualitative, control of numbers. 

The quantitative question has been much the more clearly appreciated. 
From the blessing "of the seed of Abraham" to England's recent imperative 
demand for "war brides," militaristic thought has always associated national 
greatness with a large population. A country in the stage of increasing re- 
turns places a high value upon sheer quantity of people, invites large fam- 
ilies through its social conventions, and encourages its cities to boast of their 
numbers. It is only the presence or the anticipation of diminishing returns 
that causes a nation to see truth in the Malthusian spector of pressure of 
population upon the means of subsistence. 

Half unconsciously, half deliberately, we of the United States have tried 
to realize our "national destiny" by exercising control over our numbers 
But our problem has not until recently involved restriction of population. 
1 he movement for "smaller families and better" is one of a few decades 
and It has affected only the more settled stocks. It cannot be said to have 
exercised as yet any general influence in restricting numbers. Our policy has 
been on the contrary, one of increasing our population with mechanical 
rapidity, by supplementing a high, but falling, birth-rate with an extremely 
high rate of increase through immigration. By maintaining an "open door" 
we have allowed the population of the Western world slowly to adapt itself 
to natural resources considerably augmented by the addition of America. 
In the_ process of restoring an equilibrium throughout America and Europe 
as a single social entity, population has flowed to the regions where it has 
the highest value. The passing of the "old" and the coming of the "new" 
immigration shows that the leveling process in the Western world is well 
under way, and that Southeastern Europe is being brought within the com- 
mon scheme of values. If immigration be left unrestricted, the "problem" 
will eventually disappear; but it will disappear because movement will no 
longer pay. This will come about when the lower level of material culture 
becomes dominant for the entity. 

We have increased our population by immigration because we have 
needed numbers. Our vast natural resources have demanded for their 
development vast quantities of cheap labor. A continuous immigrant stream 
has supplied an increasing demand. The result has been the rapid develop- 
ment of a vast pecuniary system, in which the older stocks have generally 
been pushed up into positions of greater responsibility and higher wages. 
Our standards of living have been further advanced by the myriads of cheap 

449 



450 CURRENT ECONOMIC PROBLEMS 

goods which immigrant labor has enabled our mills and mines to turn out. 

But, like protection, the results of immigration have not been and could 
not have been, limited to the purely industrial results which were anticipated. 
Immigration, in connection with such complementary "forces" as protection, 
the rapid accumulation of capital, the swift adaptation of the machine tech- 
nique to a new continent, has contributed to the general transformation of 
American society which has come about in the last fifty years. It has played 
its part in the overdevelopment of our natural resources, the rapid growth 
of our mining and manufacturing, the extension of our pecuniary system, 
the evolution of our urban culture, and the institutions, attitudes, and prob- 
lems which have been incident to this. Its role in the production of our 
"prosperity" has been by no means a negligible one. Its social effects are 
very closely bound up with the tariff. By accelerating the rate of our develop- 
ment and by tying up larger and larger proportions of our resources in 
industries supplying capricious wants, it has intensified the rhythm of the 
business cycle. By blessing the country with an endless stream of "green" 
labor, it has seriously weakened the bargaining position of native laborers, 
has retarded the development of group solidarity, and has slackened the rate 
of improvement of factory conditions. It has caused our national life to 
remain "in a state of perpetual transition," and inhibited the formulation of 
the standards which a stable society must possess. Through the very plasticity 
of the immigrant it has preserved too much of the older institutional system, 
despite the sweeping transformation of our social life. To this end it has 
strengthened the hold of the older individualism ; it has increased the in- 
equalities in wealth ; it has rendered the strategic position of property 
stronger ; it has added huge increments of illiteracy to the body of citizens ; 
it has delayed our achievement of social unity. 

Not content with complicating all our social problems and adding a 
quota of new ones, it has presented us a perplexing and bafffing immigration 
problem. In the pagt we have solved this in the formula, "Whosoever will, 
let him come." Our futile attempts at restriction have involved the contra- 
diction of making use of a qualitative test, that of literacy, to solve a problem 
which we have conceived of only in quantitative terms. But, if we are to 
control our growth, we must formulate a more elaborate policy. In that 
task we must ask ourselves some very pertinent questions. What place is 
the immigrant to have in the future American society? Is he ultimately to 
become one of us, or is he to constitute a permanent proletariat in a class 
society? How many immigrants can we use? What are we to use them 
for? What policy will result in securing the right number, of the right kinds, 
and in the right proportions? Have we elaborated machinery for making 
the immigrants the kinds of people we want them to be? Can such machinery 
be elaborated? What influences is the newcomer exerting, or destined to 
exert, upon our ideals, our standards, our institutions, and our programs? 
And what in the less immediate future is going to be the good of it all? 

As we as a nation become older, our problems little by little lose their 
gigantic and crude character. Our solutions must accordingly become more 
delicate and exact. With this change in our national life we are beginning 
to give more attention to the qualitative side of the population problem. As yet 
we have aimed only at "negative" results. We have tried to prevent the 
marriage and breeding of the "unfit," such as the insane, the feeble-minded, 
and those possessed of chronic and hereditary (?) diseases. We have made 
some attempt to prevent the marriages of those of radically different stocks, 
such as whites and blacks. But we have as yet formulated no positive pro- 
gram aimed at a definite result. We have, with trifling exceptions, allowed 
men of any race to come and sojourn with us. To prevent their becoming 
contributors to a future American race we have depended only upon such 
social restraints as inhere in racial antipathy and in the difference in social 
and economic positions between members of different stocks. A permanent 
control of the quality of population involves both the immigration and the 



POPULATION AND IMMIGRATION 451 

eugenics problems. We must allow only those whom we desire to come in 
or to be born. But whom do we desire? This problem is not the simple 
one of the breeder of race horses, draught animals, or fine porkers. There is 
no single and simple quality that we are to breed for, such as speed, physical 
strength, or quantity of flesh. The answer is contingent upon the answer to 
the larger and more difficult question of the kind of society we want to 
develop. 

A. THE QUESTION OF NUMBERS 
222. Utopia and the Serpent^ 

BY THOMAS HUXIvKY 

Suppose a shipload of English colonists to form a settlement in 
such a country as Tasmania was in the middle of the last century. 
On landing they find themselves in the midst of a state of nature, 
widely differing from that left behind them. They proceed tO' put 
an end to this state of things over the area they wish to occupy. 
They clear away the native vegetation, and introduce English vege- 
table and animal life, and English methods of cultivation. Con- 
sidered as a whole the colony is a compo'site unit introduced into the 
old state of nature ; and, thenceforward, a competitor in the strug- 
gle for existence. Under the conditions supposed there is no doubt 
of the result, if the work of the colonists be carried out intelligently. 
On the other hand, if they are slothful, stupid, or careless, there is 
no doubt that the old state of nature will have the best of it. 

Let us now imagine that some administrative authority, as far 
superior to men as men are to their cattle, is set over the colony. 
The administrator woiild, so far as possible, put a stop to the in- 
fluence of external competition by thoroughly extirpating the native 
rivals, whether man, beasts, or plants. And he would select his 
human agents with a view to his ideal of a successful colony. Next, 
in order that no struggle for means of existence between human 
agents should weaken the efficiency of the corporate whole, he would 
make arrangements by which each would be provided with those 
means. In other words, selection by means of a struggle for ex- 
istence betv/een man and man would be excluded. At the same 
time, the obstacles to the development of the full capacities of the 
colonists would be removed by the creation of artificial conditions 
of existence of a more favorable character. Protection against heat 
and cold ; drainage and irrigation, as preventitives of excessive rain 
and drought ; roads and canals, to overcome obstacles to locomo- 
tion; mechanical agencies to supplement the natural strength of 
men, would all be afforded. With every step in this progress in 

^Adapted from "Prolegomena" to Evolution and Ethics, v-vii (1894). 



452 CURRENT ECONOMIC PROBLEMS 

civilization, the colonists would becoine more and more independent 
of nature. To attain his ends the administrator would avail him- 
self of the courage, industry and co-operative intelligence of the 
settlers ; and it is plain that the interests oi the community would 
be best served by increasing the proportion of persons who possess 
such qualities, in other words, by selection directed toward an ideal. 
Thus the administrator might look for the establishment of an 
earthly paradise, a true garden of Eden, in which all things should 
work together toward the well-being of the gardeners, in which 
men themselves should have been selected with a view to their 
efHciency as organs for the performance of the functions of a per- 
fected society. 

But this Eden would have its serpent, and a very subtle beast 
too. Man shares with the rest of the living world the mighty 
instinct of reproduction and its consequence, the tendency to multi- 
ply with great rapidity. The better the measures of the administra- 
tor achieved their object, the more completely the destructive agen- 
cies of the state o^f nature were defeated, the less would that multi^ 
plication be checked. Thus as soon as the colonists began to mul- 
tiply, the administrator would have to face the tendency to the 
reintroduction of natural struggle into his artificial fabric, in con- 
sequence of the competition, not merely for the commodities, but 
for the means of existence. When the colony reached the limit of 
possible expansion, the surplus population must be disposed of 
somehow ; or the fierce struggle for existence must recommence 
and destroy the artificially created system. 

223. Early Appraisals of Population 

a) by an darly historian- 

And thy seed shall be as the dust of the earth, and thou shalt 
spread abroad to the west, and to the east, and to the north, and to 
the south ; and in thee and thy seed shall all the nations of the earth 
be blessed. 

b) by an Early pokt^ 

Lo, children are a heritage of Jehovah; 

And the fruit of the womb is his reward. 

As arrows in the hands of a mighty man 

So are the children of youth. 

Happy is the man that hath his quiver full of them. 

"From Gen. 28:14 (750 b. c). 

^Frorn Ps. 127 :3-S (200 b. c). , i 



POPULATION AND IMMIGRATION 453 

C) BY ARISTOTlvE* 

There is an inconsistency in equalizing the property and not regu- 
lating the number of the citizens. One would have thought that it 
was even more necessary to limit population than property ; and 
that the limit should be fixed by calculating the chances of mor- 
tality in the children, and of sterility in married persons. The neg- 
lect of this subject, which in existing states is so common, is a never- 
failing cause of poverty among the citizens, and poverty is the 
parent of revolution and crime. 

d) BY SIR WIIvLIAM TEMPIvK^ 

The true and natural ground of trade and riches is the num- 
ber of people in proportion to the compass of the ground they 
occupy. This makes all things necessary to life dear, and forces 
men to industry and parsimony. These customs which grow first 
from necessity become with time to be habitual to the country. And 
wherever they are so, that place must grow great in traffic and 
riches, if not disturbed by some accident or revolution, by which 
the people come either to be scattered or destroyed. When things 
are once in motion trade begets trade as fire does fire ; and people 
go much where people have already gone. 

K) by sir josiah child^ 

You cry up the Dutch to be a brave people, rich and full of 
cities, that they swarm with people as bee-hives with bees ; if a 
plague come they are filled up presently and such like; yet they 
do all this by inviting all the world to come and live among them. 
You complain of Spain, because their inquisition is so high, they'll 
let nobody come and live among them, and that's the main cause 
of their weakness and poverty. Will not a multitude of people 
strengthen us as well as the want of it weaken them? Sure it will. 

f) by danie;i, di;foe'' 

Whence is all this poverty of a country? 'Tis evident 'twas 
want of trade and nothing else. Trade encourages manufacture, 

^Adapted from The Politics, II, 6 (357 b.c.) ; tr. by B. Jowett. 
^Adapted from "An Essay upon the Advancement of Trade in Ireland," 
in Works, III, 2-3 (1673), 

_® Adapted from "England's Great Happiness," in McCuUoch's Select Col- 
lection of Early English Tracts on Commerce, 263 (1677). 

''Adapted from "Extracts from a Plan of English Commerce, being a 
Compleat Compendium of the Trade of This Nation," in McCulloch's Select 
Collection of Scarce and Valuable Tracts on Commerce, 112-113 (1730). 



454 CURRENT ECONOMIC PROBLEMS 

prompts invention, increases labor and pays wages. As the num- 
ber of people increase, the consumption of provisions increases. As 
the consumption of provisions increases, more lands are cultivated. 
In a word as the land is employed the people increase of course 
and the prosperity of a nation rises and falls just as trade is sup- 
ported or decayed. 'Tis by their multitude, I say, that all wheels 
of trade are set on foot, the manufacture and produce of the land 
and the sea are finished, cured and fitted for the markets abroad ; 
'tis by the largeness of their gettings that they are supported. 

g) by sir jamks STEUART^ 

The generative faculty resembles a spring with a loaded weight, 
which always exerts itself in proportion to> the diminution of resist- 
ence; when food has remained some time without augmentation or 
diminution the spring is overpowered ; the force of it becomes less 
than nothing, inhabitants will diminish at least in proportion to the 
over charge. If on the other hand food be increased the spring 
will exert itself in proportion as the resistence diminishes : people 
will begin to be better fed ; they will multiply, and in proportion as 
they increase in numbers, the food will become scarce again. 

h) by ARTHUR YOUNG^ 

In spite of the assertions of all political writers for the last 
twenty years, who place the prosperity of a nation in the greatest 
possible population, an excessive population without a great amount 
of work and without abundant productions is a devouring surplus 
for a state; for this excessive population does not get the benefits 
of subsistence, which, without this excess, they would partake of ; 
the amount of work is not sufficient for the number of hands ; and 
the price of work is lowered by the great competition of the labor- 
ers, from which follows indigence to those who cannot find work. 

l) BY ADAM FERGUSON^" 

The number in which we should wish mankind to exist is lim- 
ited only by the extent of place for their residence and of provision 
for their subsistence and accommodation; and it is commonly ob- 
served that the numbers of mankind in every situation do' multiply 

^Adapted from Principles of Political Economy, Being an Essay on the 
Science of Domestic Policy in Free States, 20 (1767). 

"Adapted from The Farmer's Tour through the East of England, 429 
(1771). 

^"Adapted from Principles of Moral and Political Science, II, 409-410 
(1792). 



POPULATION AND IMMIGRATION 455 

up tO' the mieans of subsistence. To extend these limits is good ; to 
narrow them is evil ; but although the increase in numbers may thus 
be considered as object of desire, yet it does not follow that we 
ought to wish the species thus indefinitely multiplied. 



B. THE MALTHUSIAN THEORY 
224. The Social Crisis at the Time of Malthus^^ 

BY france;sco s. nitti 

At the time of Adam Smith's death, in 1790, the French Revolu- 
tion had just burst forth, and the choice spirits of the whole of 
Europe followed it with enthusiasm and trust. Very fortunately 
for himself, Smith did not see the days of terror and the ruin of 
the French Revolution, nor did he behold the frightful economic 
crisis which later resulted from the industrial revolution in his own 
country. In what different surroundings and under what different 
conditions Malthus conceived and published his work ! 

The French Revolution was stifled in blood, and upon the politi- 
cal horizon of Europe there already appeared the showers which 
announced the Napoleonic storms. The tyrant had been killed, 
the old privileges abolished, but the illusion had also proved false 
in a great and far-reaching way ; for, in spite of reforms, society 
had remained essentially the same. 

The life of England beheld by Malthus in his youth was not 
less saddening. Various successive seasons of scarcity had impov- 
erished British agriculture, while, influenced by the rapid develop- 
ment of industries, the population increased and the phenomenon of 
over-population systematically occurred. Imports and custom du- 
ties hindered the rapid progress of the means of subsistence and 
of exchange. The evils of war and famine found a sad counter- 
part in the occurrence of a terrible industrial crisis, than which 
not even England has seen a sadder or a vaster. The great num- 
ber oi discoveries had, in fact, originated the formation of the great 
industrial system ; and, crushed by this last, the smaller industries 
were violently injured and unable to resist. Thus the old indus- 
tries died away on all sides, bringing down in their ruin thousands 
of workmen, and causing a strong feeling of misfortune to be felt 
by the whole oi England. This evil state of things was the more 
deeply felt because the new ideas, spread among the educated class- 
es, augmented the subjective causes of misery. 

"Adapted from Population and the Social System, 13-18 (1897). 



456 CURRENT ECONOMIC PROBLEMS 

The poor laws became a source of evil ; far from remedying 
pauperism, they increased it. Government provisions in favour of 
the poorer classes were inopportune. 

In short, the whole administration of public relief was defec- 
tive. Multiplying the relief given, and enlarging the practice of 
allowances was of no avail : it ended by causing a progressive de- 
cline in wages. Indeed, at one time, the tithe which the poor-rate 
levied upon the tax-payers in general, became nothing else than a 
species of subsidy given to manufacturers. In reality, the taxpay- 
ers were not burdened for the be^iefit of the poor, but of the man- 
ufacturing classes, and the tax increased sO' much that the rate of 
the wages decreased while that of the reliefs increased. Such were 
the causes which prepared and produced the pessimistic philosophy 
and economics of which Malthus was probably then the greatest 
interpreter. 

In the great disproportionate distribution of wealth originated by 
the large growing industry and the rapid technical revolution, So- 
cialism was already taking its rise. 

The chief spokesman of the new theories, WiUiam Godwin, a 
very successful agitator and a genial if not always a profound 
writer, but always most acute and daring, was placed more than any 
other in this grave contradiction. 

It is in truth very difficult to gather a broad and complete system 
from Godwin's disordered work ; what is chiefly wanting to it is 
stability O'f views. While in his celebrated book. An Inquiry Con- 
cerning Political Justice, studying the forms of property he 
distinguishes between the contrary systems of private property and 
of supply and demand, and declares himself favourable to this last 
system, and hence to that of common property ; nevertheless, he 
would have the great transformation to occur spontaneously, with- 
out revolution or the intervention of the legislature. The evils 
which oppress society belong in no way to the nature of things ; on 
the contrary, it is from human institutions that misery and injus- 
tice arise. Social wealth not only exists in sufficient quantity, but, 
if properly distributed, could afford an easy existence in exchange 
O'f moderate labour. Let wealth be properly distributed, and give 
mankind sufficient time for education and culture, and unaideci rea- 
son will become the guide of human action, and there will be no 
further need of coercion and violence. In short, Godwin's ideal 
was really an anarchical one, but mild and pacific. 

Among the greatest admirers of Godwin was the father oi Rob- 
ert Malthus. Not so the son. The study of history had shown him 
that progress, won by dint of sacrifices, was always very limited 



POPULATION AND IMMIGRATION 457 

and always gained by main force amid resolute, insurmountable, 
unceasing obstacles. Therefore, he did not trust the views of his 
father or the philosophy of Godwin ; and it was while studying them 
that he conceived the plan of collecting the chief ideas, and in 1798 
he published his famous essay. 



225. The Theory of Populations^ 

BY THOMAS ROBERT MALTHUS 

In an inquiry concerning the improvement of society, the mode 
of conducting the subject which naturally presents itself, is, i. To 
investigate the causes which have hitherto impeded the progress of 
mankind towards happiness ; and 2, To' examine the probability of 
the total or partial removal of these causes in the future. The 
principal object of this essay is to examine the effects of one great 
cause intimately united with the very nature of man. This is the 
constant tendency of all animated life to increase beyond the nour- 
ishment provided for it. 

Through the animal and vegetable kingdoms Nature has scat- 
tered the seeds of life abroad with the most profuse and liberal 
hand. If the germs of existence contained in the earth could freely 
develop themselves, they would fill millions of worlds in the course 
of a few thousand years. Necessity, that imperious, all-pervading 
law of nature restrains them' and mian alike within prescribed 
bounds. 

The effects of nature's check on man are complicated. Impelled 
to the increase of his species by an equally powerful instinct, rea- 
son interrupts his career, and asks him whether he may not bring 
beings into the world, for whom he cannot provide the means of 
support. If he hear not this suggestion, the human race will be 
constantly endeavoring to increase beyond the means of subsistence. 
But as, by that law of our nature which makes food necessary to 
the life of man, population can never actually increase beyond the 
lowest nourishment capable of supporting it, a strong check on pop- 
ulation, namely, the difficulty of acquiring food, must be constantly 
in operation. This difficulty must fall somewhere, and must neces- 
sarily be severely felt in som.e or other of the various forms of 
misery by a large portion of mankind. This conclusion will suffi- 
ciently appear from a review of the different states of society in 
which man has existed. But the subject will be seen in a clearer 

^^Adapted from An Essay on the Principle of Population, or a View of 
the Past and Present Effects on Human Happiness, 6th ed., I, 1-24 (1826). 



4S8 CURRENT ECONOMIC PROBLEMS 

light, if we endeavour tO' ascertain what would be the natural in- 
crease in population, if left to exert itself with perfect freedom. 

Many extravagant statements have been made of the length of 
the period within which the population of a country can double. 
To be perfectly sure we are far within the truth, we will take a 
slow rate, and say that population, when unchecked, goes on doub- 
ling itself every twenty-five years, or increases in a geometrical 
ratio. The rate according to which the productions of the earth 
may be supposed to increase, it will not be soi easy to determine. 
However, we may be perfectly certain that the ratio of their in- 
crease in a limited territory must be of a totally different nature 
from the ratio of the increase in population. A thousand millions 
are just as easy doubled every twenty-five years by the power of 
population as a thousand. But the food will by no means be ob- 
tained with the same facility. Man is confined in room. When 
acre has been added tO' acre till all the fertile land is occupied, the 
yearly increase in food must depend upon the melioration of the 
land already in possession. This is a fund, which, from' the nature 
of all soils, instead of increasing must be gradually diminishing. 
But population, could it be supplied with food, would gO' on with 
unexhausted vigor; and the increase in one period would furnish 
a power of increase in the next, and this without any limit. If it 
be allowed that by the best possible policy the average produce 
could be doubled in the first twenty-five years, it will be allowing 
a greater increase than could with reason be expected. In the 
next twenty-five years it is impossible to suppose that the produce 
could be quadrupled. It would be contrary to our knowledge .of the 
properties oi land. 

Let us suppose that the yearly additions which might be made 
to the former average produce, instead of decreasing as they cer- 
tainly would do, were to remain the sam.e ; and that the product of 
the land might be increased ever}"- twenty-five years, by a quantity 
equal to what it at present produces. The most enthusiastic spec- 
ulatOT can not suppose a greater increase than this. Even then 
the land could not be made to increase faster than in an arithmetical 
ratio. Taking the whole earth, the human species would increase 
as the numbers i, 2, 4, 8, 16, 32, 64, 128, 256, and subsistence as 
I, 2, 3, 4, 5, 6, 7, 8, 9. In two centuries the population would be to 
the means of subsistence as 256 to 9 ; in three centuries as 4096 to 
13, and in two thousand years the difference would be almost in- 
calculable. 

In this supposition no limits whatever are placed to the produce 
of the earth. It may increase forever* and be greater than any 



POPULATION AND IMMIGRATION 459 

assignable quantity ; yet still the power of population, being in 
every period so much greater, the increase of the human species 
can only be kept down to the level of the means of subsistence by 
the constant operation O'f the strong law of necessity, acting as a 
check upon the greater power. 

But this ultimate check to population, the want of food, is never 
the immediate check except in cases of famine. The latter consists 
in all those customs, and all those diseases, which seem to be gen- 
erated by a scarcity of the means of subsistence ; and all those causes 
which tend permanently to weaken the human frame. The checks 
may be classed under two general heads — the preventative and the 
positive. 

The preventative check, peculiar to man, arises from his reason- 
ing faculties, which enables him to calculate distant consequences. 
He sees the distress which frequently presses upon those who have 
large families ; he cannot contemplate his present possessions or 
earnings, and calculate the amount of each share, when they must 
be divided, perhaps, among seven or eight, without feeling a doubt 
whether he may be able to support the offspring which probably 
will be brought into the world. Other considerations occur. Will 
he lower his rank in life, and be obliged to give up in great meas- 
ure his former habits? Does any mode of employment present it- 
self by which he may reasonably hope to maintain a family? Will 
he not subject himself to greater difficulties and more severe labor 
than in his present state? Will he be able to give his children ade- 
quate educational advantages? Can he face the possibiHty of ex- 
posing his children to poverty or charity, b)^ his inability tO' provide 
for them? These considerations prevent a large number of people 
from pursuing the dictates of nature. 

The positive checks to population are extremely various, and in- 
clude every cause, whether arising from vice or misery, which in 
any degree contributes tO' shorten the natural duration of human 
life. Under this head may be enumerated all unwholesome occu- 
pations, severe labour, exposure to the seasons, extreme poverty, 
bad nursing of children, great towns, excesses of all kinds, the whole 
train of common diseases, wars, plagues, and famines. 

The theory of population is resolvable into three propositions : 

1. Population is necessarily limited by the means of subsistence, 

2. Population invariably increases where the means of subsistence 
increase, unless prevented by some very powerful and obvious 
checks. 3. These checks which keep population on a level with the 
means of subsistence are all resolvable into moral restraint, vice, 
and misery. 



46o CURRENT ECONOMIC PROBLEMS 

226. Malthusianism a Support of Capitalism^^ 

BY pie;rcy ravenstone 

We have new doctrines preached to us. Men, it is now discov- 
ered grow more readily than plants. Human beings overrun the 
world with the rapidity of weeds. Hence the hopeless misery. The 
earth groans under the weight of numbers. The rich it is now dis- 
covered give bread tO' the poor. Labour owes its support to idle- 
ness. Those who produce everything would starve but for the as- 
sistance of those who produce nothing. The numbers of the poor 
are to be checked by all possible means: every impediment is tO' be 
placed in the way of their marriages, lest they should multiply too 
fast for the capital of the country. The rich, on the contrary, are 
to be encouraged, everything is to be done for their benefit. For 
though they produce nothing themiselves, their capital is the cause 
of everything produced ; it gives fertility to our fields and fecundity 
to our flocks. 

These doctrines are new. It was long the established creed of 
every statesman, that in the extent of its population consisted the 
strength, the power, and the opulence of every nation; that it was 
therefore the duty of every sovereign to increase, by all prac- 
ticable means, the numher of the people committed to his charge. 
On whatever other points statesmen and legislators might differ, 
on this they were all agreed. From Lycurgus to Montesquieu the 
doctrine underwent no change. Marriage was everywhere held up 
as honourable; children were considered as entitling their fathers 
to peculiar privilege and the mark of scorn was imprinted on the 
selfish being who remained single. Poverty gave no exception, it 
rather increased the obligation. His country gratefully received 
in children the contribution of him who had nothing else to give. 
The wealth of a nation consisted in the number and strength of 
its peasantry. Men did not dream that riches could be separated 
from numbers. By these newer doctrines pestilence and famine 
are ministers of God, executing his eternal decrees, and rescuing 
us from the necessity of overwhelming wretchedness. The doctrine 
has robbed Divinity of all the charities of his nature, leaving to 
him little else than the functions of an enemy of mankind. 

The great and the rich could not be much offended at discover- 
ing that whilst their rights were augmented, they were entirely 
absolved from the performance of those actions which the less 

^^Adapted from A Few Doubts as to the Correctness of Some Opinions 
Generally Entertained on the Subjects of Pepulation and Political Economy, 
5-24 (1821). . 



POPULATION AND IMMIGRATION 461 

enlightened judgment of other times had classed amongst the most 
important and essential of their duties. To be merciful to our own 
faults, to believe onr idle expenses meritorious, to set up selfishness 
as the idol of our idolatry, and to drive away charity, are duties not 
very repugnant to our nature. They demand no sacrifice in their 
performance. The temple of virtue will be crowned with votaries, 
if it be made to- lead to the shrine of self-interest. 

Those severer morals which taught that the poor were equally 
partakers of the divine nature with the rich; that they were equally 
fashioned in the image and likeness of God; that their industry 
being the cause of all that was produced, and the rich being in real- 
ity only pensioners on their bounty, the latter were only trustees 
for the good of society ; that their wealth was given not for their 
own enjoyment, but for its better distribution through the different 
channels of society, were not likely long to maintain their hold on 
the minds of the wealthy against those sedative doctrines which 
flattered the passions, converted faults into good qualities, and made 
even conscience pander toi vices. 

It is an old and dreary systemi which represents our fellow- 
creatures as so many rivals and enemies, which makes us believe 
that their happiness is incompatible with our own, which builds our 
wealth on their poverty, and teaches that their numbers cannot con- 
sist with our comforts and enjoyments; which would persuade us 
to look on the world as a besieged town, where the death of our 
neighbors is hailed with secret satisfaction since it augments the 
quantity of provisions likely to fall to our share. To consider mis- 
ery and vice as mere arrangements of the Divinity to prevent the 
inconvenience of a too' great population of the world, is tO' adopt 
predestination in its worst form. In committing crimes we should 
only be executing the will of God ; in alleviating the distresses of 
others, in feeding the hungry and clothing the naked, we should be 
running counter to the decrees of Providence. 

But before we can adopt these conclusions, it behooves us to 
examine on what foundation the system is built. We must remem- 
ber that it is the common interests of all members which holds so- 
ciety together. Misery is not of God's creation; vice is not the 
minister of His will. I shall show that the increase in numbers in 
the human species is wholly uninfluenced by human institutions. It 
is by no means so varied in its operation as Mr. Malthus has sup- 
posed ; it affords no ground for alarm ; it calls for no restrictive 
measures, since the increase in subsistence is entirely dependent on 
the increase in numbers. Every man brings into the world the 
means of producing his own sustenance. Wherever the numbers of 



462 CURRENT ECONOMIC PROBLEMS 

the people increase more rapidly than the means of subsistence, the 
fault is not with Providence, but in the regulations of society. Cap- 
ital is no addition to the wealth of a nation ; it conduces nothing to 
the improvement of the industry ; it is merely a new distribution of 
the property of society, beneficial to some, wholly because it is in- 
jurious to others. 

227. Malthus versus the Malthusians^^ 

BY IvEONARD T. HOBHOUSE) 

The appearance of the biological theory of progress, of which 
we have been hearing much of late, was announced by the terrible 
douche of cold water thrown by Malthus on the speculative optim- 
ism of the eighteenth century. The generation preceding the French 
Revolution was a time of buoyant and sanguine outlook. There 
floated before men the idea of an age of reason when men should 
throw ofif the incubus of the past and resume a life in accordance 
with nature in a social order founded on a rational consideration 
of natural rights. Nature both in the politics and the economics 
of the time assumes a half personal and wholly benevolent character 
while human restrictions, human conventions, play the part of the 
villain in the piece. At this point Malthus intervened by calling 
attention to a "natural" law of great significance. This was the 
law that human beings multiplied in a geometrical ratio; that it 
was only by the checks of famine, pestilence, and war that they 
were prevented from overspreading the earth, and that, to cut the 
matter short, whatever the available means of subsistence, mankind 
would always, in the absence of prudential checks, multiply up to 
the limit at which those means became inadequate. True, the means 
of subsistence might be extended. New counfries might be opened 
up. New sources of food supply might be discovered. Every such 
extension, the Malthusian argued, would only redouble the rate of 
miultiplication. Checks would cease, men and women would marry 
earlier ; very soon population would again be pressing on the means 
of subsistence. The advance in civilization told in the same direc- 
tion. Population was increasing, must increase. It could be held 
in check only by the one great barrier of the subsistence limit 
against which the fringe of advancing population must forever beat 
in misery. There could be no solution of the social question ; for 
in the nature of things there must be a line where the surf of the 
advancing tide breaks upon the shore, and that shore was death 

"Adapted from Social Evolution and Political Theory, 13-16. Copyright 
by the Columbia University Press (1911). 



POPULATION AND IMMIGRATION 463 

from insufficiency of nourishment. You observe that in summariz- 
ing the arg'ument I speak partly of Malthus, partly of the Malthus- 
ians. Malthus himself, particularly in his second edition, laid stress 
on the prudential checks. He cannot fairly be accused of foster- 
ing the pessimistic views often fastened upon him. But for many 
a long year after he wrote, the efficacy of the prudential checks ap- 
peared to be very slig"ht. It was his first edition that was generally 
absorbed and that profoundly influenced social thought for nearly 
a century. It was not till the seventies that there came into opera- 
tion that general fall in the birth-rate, which has justified Malthus 
against the Malthusians, has put the calculations of the future 
growth of population on a radically different basis, and has brought 
about among other things a complete reconstruction of the biologi- 
cal argument against progress. I venture to think we may draw a 
lesson from the fate of Malthusianism: Mathematical arguments 
drawn from the assumption that human beings proceed with the 
statistical regularity of a flock of sheep are exceedingly difficult 
to refute in detail, and yet they rest on an insecure foundation. 
Man is not merely an animal. He is a rational being. The Mal- 
thusian theory was one cause of the defeat of its own prophecies. 
It was the belief that population was growing too fast that operated 
indirectly to check it. Those who fear that population is now 
growing top slowly, may take some comfort from the reflection. 
We are not hastily to assume inevitable tendencies in human socie- 
ty, because the moment society is aware of its tendencies a new 
fact is introduced. Man, unlike other animals, is moved by the 
knowledge oi ends, and can and does correct the tendencies whose 
results he sees to be disastrous. The alarmist talk of race suicide 
may serve its purpose if only by admonishing us of the fate of a 
theory based on what appears to be a most convincing biological 
calculation. 

C. THE COMING OF THE IMMIGRANT 
228. The Falling Birth-Rate^^ 

BY Edward aes worth ross 

A century ago Malthus startled the world by demonstrating that 
our race naturally multiplies faster than it can increase its food 
supply, with the result that population tends ever to press painfully 
upon the means of subsistence. So long as mankind reproduces 

^^ Adapted from Changing America, 32-49. Copyright by The Century 
Company (1912). 



464 CURRENT ECONOMIC PROBLEMS 

freely, numbers can be adjusted tO' resources only by the grinding 
of destructive agencies, such as war, famine, poverty and disease. 
To be sure, this ghastly train of ills may be escaped if only people 
will prudently postpone marriage. Since, however, late marriage 
calls for the exercise of more foresight and self-control than can 
be looked for in the masses, Malthus painted the future of humanity 
with a somberness that gave political economy its early nickname 
of "the dismal science." 

Malthus is not in the least "refuted" by the fact that, during his 
century, the inhabitants of Europe leaped in number from one hun- 
dred and eighty-seven millions to four hundred millions, with no 
increase but rather diminution of misery. It is true, unprecedented 
successes in augmenting the food supply have staved off the over- 
population danger. Within a life time, not only have the arts O'f 
food raising made giant strides, but, at the world's rim., great virgin 
tracts have been brought under the plow, while steam hurries to 
the larders of the Old World their surplus produce. But such a 
bounty of the gods is not rashly to be capitalized. While there is 
no limit to be set to the progress of scientific agriculture, no one 
can show where our century is to find its Mississippi Valley, Argen- 
tina, Canada, or New Zealand, to fill with herds or farms. The 
vaunted plenty of our timie adjourns but does not dispel the haunt- 
ing vision of a starving race on a crowded planet. 

Nevertheless, the clouds that hung low about the future are 
breaking. The terrible Malthus failed to anticipate certain influ- 
ences which in some places have already so far checked multiplica- 
tion as to ameliorate the lot of even the lower and broader social 
layers. The sagg'ing of the national birth-rate made its first ap- 
pearance about fifty years ago in France, thereby giving the other 
peoples a chance tO' thank God they were not as these decadent 
French. But the thing has become so general that today no people 
dares to point the finger of scorn. In 1878, the fall of the birth- 
rate beg'an in England. During the eighties, it invaded Belgium, 
Holland, and Switzerland. In 1889 it seized with great virulence 
upon Australia. Just before the close of the century Finland, Italy, 
and Hungary fell into line. In Germany and Austria it is only 
within four or five years that the economists have begun to discuss 
"our diminishing fecundity." In all Christendom, only Russia, the 
Balkan states and French Canada show the old-fashioned birth-rates 
of forty, fifty, or even fifty-five, per thousand. The tendency in the 
United States is best revealed in the diminishing number of children 
under five years to each thousand women of child-bearing age. The 
decline from i860 to- 1890 is 24 per cent. 



POPULATION AND IMMIGRATION 465 

Owing tO' the fact that the death rate has been falHng even 
faster than the birth rate, there is, so far, no slackening in the 
growth of numbers. Indeed, part of the fall in the birth rate merely 
reflects the increasing proportion of aged. 

The forces reducing the death-rate are by no means the same 
as those cutting down the birth-rate, nor have they the same sphere 
of operation. Deaths are fewer because of advances in medicine, 
better medical education, public hospitals, pure water supply, milk 
inspection, housing refo'rm and sanitation. Births are rarer owing 
to enlightenment, the ascent of women, and individualistic democ- 
racy. The former may be introduced quickly, from above. The 
latter await the slow action of the school, the press, the ballot, the 
loosening of custom. 

An abrupt fall in the birth-rate of from 10 to 20 per cent among 
the four hundred million bearers of the Occidental torch is a phe- 
nomenon so vast and so pregnant as to excite the liveliest specu- 
lation. Some lay it to physiological sterility produced by alcohol, 
city life and over-civilization. There are, indeed, in some quarters, 
notably in New England, evidences of a decline in female fertility ; 
but, on the whole, the lower birth-rate reflects the smaller size of 
families rather than the greater frequency of childless couples. 

Others insist that vice, club-life, the comfortable celibacy of 
cities, and the access of women to the occupations are turning peo- 
ple away from wedlock. It is true that the proportion of single 
women is increasing with us. Still, few peoples are so much mar- 
ried as Americans, and, for all that, their birth-rate has fallen fast 
and fallen far. Michigan, which is about as addicted to the mar- 
ried state as any white community in the world, has only two-thirds 
the fecundity of England and half that oi Hungary. 

Perhaps the master force of our time is democracy. The bar- 
riers of caste are down so that more and more a man's social stand- 
ing depends upon himself. The lists of life are open to all, and the 
passion to "succeed" grows with the value of the prizes to be won. 
Never before did so many common people strain to reach a higher 
rung in the social ladder. But prudence bids these eager climbers 
avoid whatever will impede one's ascent or imperil one's footing. 
Children are incumbrances, so the ambitious dread the handicap of 
an early inarriage and a large family. Even the unselfish, whose 
aim is to assure their children a social position ecjual to or superior 
to their own, will see to it that there are not more children than 
they can properly equip. 

The effect of democracy is reinforced by the break-up of custom. 
As fixed class distinctions fade out, people cease to be guided by the 



466 CURRENT ECONOMIC PROBLEMS 

traditional standard of comfort. It is no longer enough to live as 
father and mother lived. Wants and tastes, once confined to the 
social elect, spread resistlessly downward and infect the masses. 
Here the decencies, there the comforts, yonder the vanities of life 
comipete with the possible child and bar it from existence. 

The great movement that has burst the fetters on woman's mind, 
and opened to her so many careers, exalts her in the marriage part- 
nership and causes the heavy price of motherhood to be more con- 
sidered by her husband as well as by herself. 

However we account for the fall in the birth-rate, there is no 
question as to its consequences. The decline registers itself in a 
rising plane oi comfort, a growth of small savings, and a wider 
diffusion of ownership. Owing tO' the better care enjoyed by the 
aged when they do not have to compete for attention with an over- 
large brood oi wailing infants, there is a striking increase in lon- 
gevity. A greater proportion of lives are rounded out to the Psalm- 
ist's term. There is also a wonderful saving of life among infants, 
for often prolificacy does nothing but fill the churchyards with wee 
mounds. When we consider that in 1790 there were in this coun- 
try just twice as many children under 16 to adults over 20 as there 
are today we understand why the law limits child labor and insists 
on keeping children in school. 

But the supreme service oi forethoughted parenthood is that it 
bids fair to deliver us from the overpopulation horror, which was 
becoming more imminent with every stride in medicine or public 
hygiene. Most of the Western peoples have now an excess of births 
over deaths of one per cent a year. If even a third of this increase 
should find a footing over sea, then home expansion would still be 
such that, at a future date no more remote from us than the found- 
ing of Jamestown, Europe would groan under a population of three 
billions, while the United States of that day, with twice as many 
people as Europe now has, would be to China what China is to the 
-present United States. Besides its attendant miser}^ and degrada- 
tion, population pressure sharpens every form of struggle among 
men, — competition, class strife, and war — and the dream of a moral 
redemption of our race would vanish intO' thin air if the enlightened 
peoples had failed to meet the crisis created by the reduction of 
mortality. 

Once it seemed as if man's propensity to multiply foredoomed 
him to live ever in the presence of vast immediate woe. However 
smiling the gardens of Daphne they had always tO' slope down into 
a huge malodorous quagmire of wretchedness. The wheel of Ixion, 
the cup of Tantalus, symbolized humanity striving ever by labor 



POPULATION AND IMMIGRATION 467 

and ingenuity to relieve itself of a painful burden, only tO' have 
that burden inexorably rolled back upon it by its own fatal fecun- 
dity. 

Now that cheap travel stirs the social deeps and far-beckoning 
opportunity fills the steerages, immigration becomes ever more 
serious to the people that hopes to rid itself at least of slums, 
"masses" and "submerged." What is the good of practising pru- 
dence in the family if hungry strangers may crowd in and occupy 
at the banquet table of life the places reserved for its children? 
Shall it, in order to relieve the teeming lands of their unemployed, 
abide in the pit of wolfish competition and renounce the fair pros- 
pect of a growth in suavity, comfort, and refinement? If not, then 
the low-pressure society must not only slam its doors upon the in- 
draught, but must double-lock them with forts and iron-clads, lest 
they be burst open by assault from some quarter where "cannon 
food" is cheap. 

The rush of developments makes it certain that the vision of a 
globe "lapt in universal law" is premature. If the seers of the mid- 
century who looked for the speedy triumph of free trade had read 
their Malthus aright, they might have anticipated the tariff barriers 
that have risen on all hands within the last thirty years. So, today, 
one needs no prophet's mantle tO' foresee that presently the world 
will be cut up with immigration barriers which will never be leveled 
until the intelligent accommodation of numbers tO' resources has 
greatly equalized population pressure all over the globe. The French 
resent the million and a third aliens that have been squeezed into 
hollow and prosperous France by pressure in the neig'hbor lands. 
The English restrict immigration from the Continent. The Germans 
feel the thrust from the overstocked Slavic areas. The United 
States, Canada, Australia and South Africa are barring out the 
Asiatic. Dams against the color races, with spillways of course for 
students, merchants, and travelers, will presently enclose the white 
man's world. Within this area minor dams will protect the high 
wages of the less prolific peoples against the surplus labor of the 
more prolific. 

Assuredly, every small-family nation will try to raise such a 
dam and every big-family nation will try to break it down. The 
outlook for peace and disarmament is, therefore, far from bright. 
One needs but compare the population-pressures in France, Ger- 
many, Russia and Japan to realize that, even today, the real enemy 
of the dove of peace is not the eagle of pride or the vulture of greed 
but the stork! 



468 CURRENT ECONOMIC PROBLEMS 

229. The Immigrant Invasion^® 

BY I^RANK JUIvIAN WARNE) 

At the time of the appearance of the comet in 1910 there was in 
progress the most remarkable and in many ways the most wonder- 
ful invasion of one country by peoples of foreign countries that the 
world had ever seen. In the very month of May, when the comet's 
appearance in the heavens was being heralded in the newspapers, 
as many as one hundred and fifty thousand representatives of differ- 
ent races and countries of the world were entering the immigrant 
ports of the United States. They were equal to one hundred and 
fifty full regiments of one thousand each ; they were double the 
entire fighting strength of the United States Army. More than one 
million people from all the countries on the globe were that year 
passing in a seemingly never-ending stream into the United States. 

They came from' the British and the Spanish Americas, from 
Europe and from Africa, from Asia and from India, from the is- 
lands of the Pacific and the islands of the Atlantic. From the 
United Kingdom and the Russian Empire, from the Scandinavian 
countries and the Netherlands, from the German Empire and the 
Dual Kingdom of Austria-Hungary, from Turkey in Europe and 
Turkey in Asia, from Italy and China and Japan, they came. There 
was not a single geoigraphical ot politically organized area of im- 
portance from which they did not come. England, Ireland, Scot- 
land, Wales, Norway, Sweden, Denmark, Holland, Belgium, Swit- 
zerland, France, Spain, Portugal, Roumania, Greece, Armenia, Per- 
sia, Syria, Sicily and Sardinia, the Cape Verde and Azores Islands, 
the Canary and Balearic Islands, British Honduras, Tasmania, and 
New Zealand, the Philippines, Hawaii, the East and the West In- 
dies, Cuba, Canada, Mexico, and South and Central American coun- 
tries — each and all and more were represented. 

The sources of this stream^ of immigration are four great stocks 
of the human race — the Aryan, the Semitic, the Sinitic, and the 
Sibiric. From the homes of these, as they have scattered them- 
selves among the Teutonic, Celtic, Slavonic, Lettic, Italic, Hellenic, 
Illyric, Indo-Iranic, Chaldean, Chinese, Japanese, Finnic, and Tar- 
taric groups, this stream is pouring. The peoples composing it are 
Scandinavians, Dutch, Flemish, Germans, English; Irish, Welsh, 
Scotch; Bohemians, Dalmatians, Moravians, Croatians, Poles, Slov- 
enians, Bulgarians, Russians, Servians, Ruthenians, Montenegrins, 
Bosnians, Herzegovinians, Slovaks ; Letts and Lithuanians ; French. 

^"Adapted from The Immigrant Invasion, 1-21. Copyright by Dodd, Mead 
& Co. (1913). 



POPULATION AND IMMIGRATION 469 

Italians, Portuguese, Roumanians, and Spaniards ; Greeks ; Alban- 
ians ; Armenians, Persians, and Gypsies ; Hebrews and Syrians ; 
Chinese ; Japanese and Koreans ; Finns and Magyars ; and Turks. 
Besides, we have coming to us Berbers and Arabs from northern 
Africa, Bretons from western France, Esthonians from western 
Russia, Esquimaux from western Alaska, Spanish Americans from 
South America. And not even all these exhaust the multitudinous 
sources contributing to our foreign-born population. 

Unlike the invasions of other centuries and of other countries, 
the present-day immigration to the United States is not by organized 
armies coming to conquer by the sword. It is made up of detached 
individuals, or at most, of family or racial groups, afoot, the sword 
not only sheathed but also entirely discarded by those who have 
no idea of battling with arms for that which they come to seek. 
They do not come as armed horsemen, with their herds of cattle 
and skin-canopied wagons. Nor do they present themselves at our 
doors in "great red ships," with the ensign of the rover hanging 
from the topmast, and clad in chain-mail shirts and with helmets. 

More than twenty-eight million have entered the United States 
from all parts of the world during the ninety years since 1820! In 
the course of the nineteenth centun^, and the first decade of the 
twentieth century, there came more than five million from Germany, 
four million from Ireland, more than three million from each of 
Austria-Hungary, and Italy, three million from England, Scotland, 
and Wales ; nearly two and one-half million from Russia ; nearly 
two million from Norway, Denmark, and Sweden ; and about five 
hundred thousand from France. 

More than twenty-five million immigrants came within the sixty 
years since 1850; and more than nineteen million came within the 
last thirty years. The ten years ending with 1910 gave us a total 
immigration exceeding 8,795,000, nearly five million of those arriv- 
ing within the past five years. In the single year 1910 the number 
of arrivals exceeded one million by 41,000; in the twelve months 
three years before they had reached 1,285,000, this being the largest 
single yearly inflow of foreign born in the history of the country. 

Taking the average for the past ten years, we find that there 
came annually more than eight hundred and seventy-nine thousand 
immigrants ; for every month more than seventy-three thousand ; 
for every day, Sundays and holidays included, two thousand four 
himdred and forty, and for every time the clock struck the hour, 
day and night, one hundred persons born in some foreign country 
landed on the shores of the United States. 



470 CURRENT ECONOMIC PROBLEMS 

Truly a wonderful invasion! A stupendous army! An army 
that has been marching continually all these years — an army whose 
ranks, although changing racially, have not been depleted but have 
steadily and at times alarmingly increased in numbers as the decades 
have gone by. Here is a phenomenon before which we must stand 
in awe and amazement when contemplating its consequences to the 
human race! 

Think you that any such numbers invaded the Roman world 
when the Huns poured in from the East? Was Attila's army one- 
half, even one-tenth, as large when it overran Gaul and Italy? Did 
the Saxons in the sixth century invade England in any such num- 
bers? Or, did William the Conqueror lead any such army in the 
Norman invasion of England in the eleventh century? And yet, 
upon the peoples of those countries the miark of the invader is seen 
to this day. Think you that America alone will escape the conse- 
quences ? 

Let us look at the volume of this invasion from another angle. 
There were in the United States in 1910 more than 13,500,000 per- 
sons who had been born in some foreign country. That is, one out 
of every seven of our population came here, not through having 
been born here, but through immigration. The largest contribu- 
tion was from Germany, the next largest from Russia ; then came 
Ireland and Italy in a close race for third place, the number of the 
former exceeding those from Italy by less than ten thousand. Aus- 
tria, including Bohemia and a part of what formerly was Poland, 
held fifth place; Canada was in sixth and England in seventh place, 
Sweden in eighth, Hungary in ninth, and Norway in tenth. 

These ten countries contributed more than 11,600,000, of the 
13,500,000 or all but 1,900,000 of our foreign born. Their propor- 
tion of the total was about 86 per cent. The other countries or geo- 
graphical and political divisions represented in the foreign-born 
population of the United States in 1910 were Scotland, Wales, Den- 
mark, Holland, Belgium, Euxemburg, Switzerland, Portugal, Spain, 
France, Finland, Roumania, Bulgaria, Servia, Montenegro, Turkey, 
Greece, Newfoundland, Cuba, West Indies, Mexico, Central Amer- 
ica, South America, Japan, China, India, Asia, Africa, Australia, 
Atlantic Islands, Pacific Islands, and other countries not specified. 

Religiously they are believers in Roman and Greek Catholicism, 
Protestantism in its manifold forms and variations, Mohammedan- 
ism, Armenianism, Buddhism, Confucianism, Judaism, Shamanism, 
Islamism, Shintoism, and hundreds of diversified sects, some with 
such strange names as Chiah, Sunni, Parsee, Nestorian, Maronite, 
Druse, Osmanlis, Laotse, and so on. 



POPULATION AND IMMIGRATION 471 

Linguistically they are German, Dutch, Scandinavian, including 
Danish, Norwegian, and SAvedish, Flemish, English, Gaelic, Cym- 
ric, Slavic, including Russian, Serbo-Croatian, Polish, and Bohe- 
mian; French, Italian, Spanish, Roumanian, Portuguese, Rheto- 
Roman, Greek, Albanian, Lithuanian, Lettic, Amienian, Persian, 
Yiddish, Semitic, Turkish, Finnish, Magyar, Chinese, Japanese, 
Korean, Mexican, Spanish American, and other groups distinguish- 
ed by the language they speak. Among these are such strange and 
unfamiliar dialects as Friesian, Thuringian, Franconian, Swabian, 
Alsatian, Wallon, Gascon, Languedocian, Rhodanian, Catalan, Gal- 
ego, Friulan, Gegish, Toskish, Pamir, Caspian, Syriac, Aramaic, 
Shkipetar, and so on. 

Some conception of the significance of the numerical strength 
of the foreign born in the United States is gained by means of a 
few simple comparisons. They number over three and one-half 
millions more than all the negro population of the entire country. 
They equal more than twice the total population, and nearly three 
times that of the native, of the six New England States ; they would 
populate the seven states of Minnesota, Iowa, Missouri, the two 
Dakotas, Nebraska, and Kansas, with their present density, and still 
have an extra 1,880,000; they supply a population 1,300,000 in ex- 
cess of the total found today in the South Atlantic division, includ- 
ing, besides the District of Columbia, also Delaware, Maryland, the 
two Virginias, the two Carolinas, Georgia, and Florida. 

Considering the native population only, which includes also the 
children born here of foreign-born parents, our total foreign born 
equals all the natives in the twenty-two states of Maine, New Hamp- 
shire, Vermont, Massachusetts, Rhode Island, Connecticut, Dela- 
ware, Florida, the two Dakotas, Kansas, Montana, Idaho, Wyom- 
ing, Colorado, New Mexico, Arizona, Utah, Nevada, California, 
Oregon, and Washington. 

230. Immigration in a Single Year^^ 

BY F. A. OGG 

It is not easy to conceive what our immigration has come to be. 
The figures are too stupendous tO' be grasped by the mind. Let one 
who has sat in the magnificent Stadium at Cambridge, as one of the 
40,000 spectators at a Harvard- Yale football game, reflect that if 
the immigrants entering our ports during the fiscal year 1906 were 
broug'ht together, they would make a throng twenty-five and a half 
times as large as that which crowds every available foot of space 

^'From an article in The World's Work, XIV, 8879-8886. Copyright 
(1907). 



472 CURRENT ECONOMIC PROBLEMS 

around the great oval. Let him consider that the number admitted 
in this twelvemonth from Norway and Sweden alone would more 
than fill the Stadium ; that the number from Germany would do 
the same; that the influx from Great Britain would fill it two and 
one-half times. That from Russia would fill it more than five 
times ; that from Austria-Hungary would fill it more than six times ; 
and the contributions from Italy would do it seven times with 
people to spare. Let him further call tO' mind that, on the average, 
the Stadium could be packed with the aliens who are landed at Ellis 
Island every seventeen days throughout the year. 

Then let him consider that the total number of immigrants 
admitted in 1906 would nearly serve to populate either the city of 
Philadelphia, or the cities of Boston and Baltimore combined ; that, 
in fact it would people all Maryland, or all Nebraska, or the whole 
region occupied by Arizona, New Mexico-, Utah, Idaho, Wyoming, 
and Montana. These six states and territories have an aggregate 
area of 649,320 square miles, which is nearly 18 per cent of the 
total area of the United States. 

231. American Appraisals of Immigration 

a) The Problem of Distribution}^ 

We have room enough; let them come. But the immigrants 
should pass into the interior. In the present state of the times we 
seem too thick on the maritime frontier already. Within there is 
ample and profitable employment for all, in almost every branch 
of business, and strangers should be encouraged to seek it there. 

b) The Old Immigration and the Nezv^^ 

BY S. I^. B. MORSE 

Then we were few, feeble, and scattered. Now, we are numer- 
ous, strong and concentrated. Then our accessions of immigration 
were real accessions of strength from the ranks of the learned and 
the good, from enlightened mechanic and artisan and intelligent 
husbandman. Now, immigration is the accession of weakness, from 
the ignorant and vicious, or the priest-ridden slaves of Ireland and 
Germany, or the outcast tenants of the poorhouses and prisons of 
Europe. 

^^Adapted from Niles' Register, VII, 359 (1817). 

^"Adapted from Imminent Dangers to the Institutions of the United 
States through Foreign Immigration, etc., by "An American" (1835). 



POPULATION AND IMMIGRATION 473 

c) Not Wops, but Irishmenr° 

They had an utter disregard for felHng forests and turning up 
the prairies for themselves. They preferred to stay where another 
race would furnish them with food, clothing, and labor, and hence 
were mostly found loitering on the lines of the public works in vil- 
lages and in the worst portions of the large cities, where they com- 
peted with the negroes, between whom and themselves there was an 
inveterate dislike, for the most degrading employment. 

d) Not Like the Old Immigrants'^ 

BY M. D. UCHLITER 

The immigration of the present is not the immigration of forty 
years ago. We protest against the admission of those who come to 
this country whose habits and manner of life tear down the standard 
of American life, of living, and of wages, and whose traits of char- 
acter, low order of intelligence, and inferior standard of life renders 
it impossible for them, even if they had the desire, to maintain the 
highest ideals of American morality and citizenship. 

e) Freedom of Opportunity^' 

BY HKNRY A. RODKNBURG 

It has long been our proud boast that ours is the land of liberty 
and opportunity. Here on the hospitable shores of the "home of 
the free" the persecuted of the earth have always found a refuge 
and an asylum. We recognize neither class nor caste, nationality 
nor religion. Every honest immigrant, no matter from what country 
he hails, whether from the north of Europe, the south of Europe, 
the east of Europe, or the west of Europe, if able to meet the re- 
quirements of our liberal immigration laws, is invited to partake of 
our liberties and to join with us in working out the manifest destiny 
of the American Republic. It is this spirit that lies at the basis of 
our national greatness. I would not discriminate against the Italian, 
the Hungarian, or the Pole. I have not forgotten that Columbus 
was the son of an Italian laborer. I have not forgotten that among 

""Adapted from the Report of the Association of the Condition of the 
Poor. Reprinted in Report of the Immigration Commission, XV, 462 (i860). 

^^Adapted from testimony before the Immigration Commission, in Re- 
ports, XLI, 16 (1910). 

""Adapted from a speech delivered in the House of Representatives, July 
26, 1912. 



474 CURRENT ECONOMIC PROBLEMS 

the great sculptors and artists who have given Italy her proud place 
in the world of arts are the sons of men who earned their bread in 
the sweat of their brows. Ah, genius knows no nationality, and is 
not the result of birth or location. 

D. IMMIGRATION AND INDUSTRIAL DEVELOPMENT 
232. Our Industrial Debt to Immigrants-^ 

BY PE;TER ROBIERTS 

The new immigration in one respect differs very markedly from 
the old ; the percentage of farmers and farm laborers in this new 
stream is sixfold what it was in the old. In the last decade, the 
countries of southeastern Europe have sent us two and a half mil- 
lion men, who, in the old country, were tillers of the soil ; but it 
is safe to say that the number following that occupation in the new 
world is insignificant. They are employed in industrial plants, in 
which their labor brings quick returns, and if dissatisfied with 
wages and conditions they can, in a day, pull up stakes and go 
elsewhere. The new immigration consequently contains more un- 
skilled workers than the Oild. 

America, two generations agO', was an agricultural nation; to- 
day it stands in the van of the industrial nations of the earth. This 
marvelous development, the astonishment of the civilized world, 
could never have taken place, if Europe and Asia had not supplied 
the labor force. From 1880 to 1905 the total capital in manufac- 
turing plants increased nearly fivefold, the value of the products 
increased more than two and a half times, and the labor force 
about doubled. America coiuld never have finished its transcon- 
tinental railroads, developed its coal and ore deposits, operated its 
furnaces and factories, had it not drawn upon Europe for its labor 
force ; for it was impossible to secure "white men" tO' do this work. 

American industry had a place for the stolid, strong, submis- 
sive and patient Slav and Finn ; it needed the mercurial Italian and 
Roumanian ; there was much coarse, rough, and heavy work to do 
in mining and construction camps; in tunnel and railroad building; 
around smelters and furnaces, etc., and nowhere in the world could 
employers get laborers so well adapted to- their need, as in the 
countries of southeastern Europe. 

Louis N. Hammerling, President of the American Association 
of Foreign Newspapers, appearing before the Federal Commission 

"'^Adapted from The New Immigration, 49-62. Copyright by The Mac- 
mlllan Company (1912). 



POPULATION AND IMMIGRATION 475 

on Immigration, said : ( i ) Sixty-five per cent of the farmers 
owning farms and working as farm laborers are people who came 
from Europe during the last thirty years. (2) Of the 890,000 
miners, mining the coal to operate the great industries, 630,000 
are our people. (3) Of the 580,000 steel and iron workers em- 
ployed in the different plants throughout the United States, 69 per 
cent, according tO' the latest statistics of the steel and iron indus- 
tries, are our people. (4) Ninety per cent of the labor employed 
for the last thirty years in building the railways has been furnished 
by our immigrant people, who' are now keeping the same in re- 
pair. 

The census of 1900 showed that 75 per cent of the tailors of the 
country were foreign-born. The investigation of the ImmigTation 
Commission showed 72.2 per cent of the workers in the clothing 
trades foreign-born, and another 22.4 per cent was made up of 
the children of foreign-born parents ; thus 94.6 per cent of the men 
and women who manufacture ready-made garments are of foreign 
parentage. 

Wherever unskilled work is needed, the foreigner is the one 
who does it. He is the toiler, the drudge, the "choreman." In the 
slaughtering and meat-packing industry, the foreign-born comprise 
about 60 per cent of the labor force, but if you want to locate the 
sons of the new immigration in a plant of this character, you must 
descend to the pits where the hides are cured, generally located in 
dark and damp basements. Go to the fertilizing plant where the 
refuse of the slaughter house is assembled, and amid the malodor- 
ous smells which combine into one rank stench tabooed by all Eng- 
lish-speaking men, you find the foreigner. Go to the soap depart- 
ment, where the fats are reduced and the alkalis are mixed — a place 
you smell from afar and wish to escape from as soon as possible, 
and there the foreigner is found. These disagreeable occupations 
"white people" have forsaken, and the sons of the new immigration 
do the work uncomplainingly for $1.50 a day. 

Wherever digging, excavating, constructing, machine molding, 
and mining go on, there we find the foreign-born. The patient, 
willing, and constant labor of the Italians made possible the sub- 
ways of the great metropolis of the nation ; the Bronx Sewer was 
dug by Italians, Austrians, and Russians. These are the workers 
who enlarge the Barge Canal and build the Aqueduct to carry an 
adequate supply of water to the millions of New York City. In 
lumber camps, in mine patches, in railroad construction work, the 
foreigner is found. He displaces colored labor in construction 
camps in the South ; and, in the West, he does the unskilled labor 



476 CURRENT ECONOMIC PROBLEMS 

unless a legal barrier has been erected to keep him out. The labor 
force in the woods of Michigan and Minnesota, of Maine and Ver- 
mont, is preponderatingly made up of foreigners. 

The aliens are the backbone of the mining industry. Calumet, 
in the northern peninsula oi Michigan, is a foreign city of 45,000 
souls. There are sixteen different nationalities represented on the 
public school teaching force, and the pupils in the high school 
represent twenty different races. It is difficult to find an Amer- 
ican in- the place. If you want to find the native-born, you must 
go tO' Houghton, the capital of the county, where the doctors and 
lawyers, engineers and professors, retired capitalists and the leisure 
class live. And it is the same in the mining camps all through 
this upper peninsula O'f Michigan. The men who dig the ore, load 
it and clean it, whO' burn the powder and remove the rock, who 
crawl through dog holes and climb numlberless ladders, are for- 
eigners. The only crowd met with in the territor}^ not of foreign 
parentage are the young college graduates, incipient civil engineers, 
who put into practice the theories they were taught in college. The 
same is true, generally speaking, of the coal mining industry. 

The United States owes much to the man of the new immi- 
gration. No' true American will withhold the meed of praise due 
this man. The consensus of opinion of superintendents and fore- 
men who have used these men is that they have played their part 
with a devotion, amiability, and steadiness not excelled by men of 
the old immigration. 

233, The Manna of Cheap Labor^* 

BY Edward ai^sworth ross 

It is not as cargo that the immigrant yields his biggest dividends. 
But for him we could not have laid low the many forests, dug up so 
much mineral, set going so many factories, or built up such an export 
trade as we have. In most of our basic industries the new immi- 
grants constitute at least half the labor force. Although millions 
have come in there is no sign of supersaturation, no progressive 
growth of lack of employment. Somehow new mines have been 
opened and new mills started fast enough to swallow them up. Vir- 
tually all of them are at work and, what is more, at work in an effi- 
cient system, under intelligent direction. Janko produces more than 
he did at home, consumes more, and, above all, makes more profit 
for his employer than the American he displaces. Thanks to him 

^* Adapted from "The Old World in the New," in The Century Magazine, 
LXXXVII, 29. Copyright (1913). 



POPULATION AND IMMIGRATION 477 

we have bigger outputs, tonnages, trade balances, fortunes, tips, and 
alimonies ; also bigger slums, red-light districts, breweries, hospitals, 
and death rates. 

To the employer of unskilled labor this flow of aliens, many of 
them used to dirt floors, a vegetable diet, and child labor, and ignor- 
ant of underclothing, newspapers, and trade unions, is like a rain of 
manna. For, as regards foreign competition, his own position is a 
Gibraltar. Our tariff has been designed to protect him. Thus as 
long as he stays in his home market, the American mill owner is 
shielded from foreign competition, while the common labor he re- 
quires is cheapened for him by the endless inflow of the neediest, 
meekest laborers to be found within the white race. If in time they 
become ambitious and demanding, there are plenty of "greenies" 
he can use to teach them a lesson. The "Hunkies" pay their "bit" 
to the foremen for the job, are driven through the twelve-hour day, 
and in time are scrapped with as little concern as one throws away 
a thread-worn bolt. A plate mill which had experienced no tech- 
nical improvement in ten years doubled its production per man by 
driving the workers. No wonder then that in the forty years the 
American capitalist has had Aladdin's lamp to rub, his profits 
from mill and steel works, from packing-house and glass factory, 
have created a sensational "prosperity" of which a constantly 
diminishing part leaks down to the wage-earners. Nevertheless, 
the system which allows the manufacturer to buy at a semi-European 
wage much of the labor that he converts into goods to sell at an 
American price has been maintained as "the protection of Amer- 
ican labor!" 

E. IMMIGRATION AND LABOR CONDITIONS 

234. Living Conditions among Home Laborers-^ 

BY CHARLES DICKENS 

These girls were all well dressed; and that phrase necessarily 
includes extreme cleanliness. They had serviceable bonnets, good 
warm cloaks and shawls, and were not above clogs and pattern. 
Moreover, there were places in the mill where they could deposit 
these things without injury; and there were conveniences for wash- 
ing. They were healthy in appearance, and had the manners and 
deportment of young women ; not of degraded brutes of burden. 

The rooms in which they worked were as well ordered as them- 
selves. In the windows of some there were green plants which 

^^ Adapted from American Notes, 56-57 (1841). 



478 CURRENT ECONOMIC PROBLEMS 

were trained to shade the glass; in all, there was very much fresh 
air, cleanliness, and comfort as the nature of the occupation would 
possibly admit of. Out of so large a number of females, it may 
reasonably be supposed that some were delicate and fragile in ap- 
pearance; no doubt there were. But I solemnly declare that, from 
all the crowd I saw in the different factories that day, I cannot recall 
one young face that gave me a painful impression; not one young 
girl, assuming it to be a matter of necessity that she should gain 
her daily bread by the labor of her hands, I would have removed 
from those works if I had had the power. 

They reside in various boarding-houses near at hand. The own- 
ers of the mills are particularly careful to allow no persons to enter 
upon the possession of these houses whose characters have not un- 
dergone the most searching and thorough inquiry. Any complaint 
that is made against them is fully investigated, and if good ground 
for complaint be shown, their occupation is handed over to some 
more deserving person. There are a few children employed in these 
factories, but not many. The laws of the state forbid their working 
more than nine months in the year, and require that they be edu- 
cated during the other three. For this purpose there are schools in 
Lowell, and there are churches and chapels of various persuasions, 
in which the young women may observe that form of worship in 
which they have been educated. 

I am now going to state three facts which will startle a large 
class of readers on this side of the Atlantic very much. Firstly, 
there is a joint stock piano in a great many of the boarding-houses. 
Secondly, nearly all of these young ladies subscribe to circulating 
libraries. Thirdly, they have got up among themselves a periodical. 



235. The Standard of Living of the New Immigrants^*' 

BY I. A. HOURWICH 

The objection to the unskilled immigrant is based upon the 
belief that because of his lower standard of living he is satisfied 
with lower wages than the American or the older immigrant. It 
is therefore taken for granted that the effect of the great tide of 
immigration in recent 3^ears has been to reduce the rate of wages 
or to prevent it from rising. The fallacy of this reasoning is due 
to an attempt to compare the standard of living of the unskilled 
laborer with that of the skilled mechanic. To prove that the newer 

^^Adapted from Immigration and Labor, 19-22. Copyright by G. P. Put- 
nam's Sons (1912). 



POPULATION AND IMMIGRATION 479 

immigrants have introduced a lower standard of living, the latter 
ought to be compared with the standard of living of unskilled 
laborers in the past. 

Housing conditions have been most dwelt upon, because they 
strike the eye of the outsider. Historical studies of housing con- 
ditions show, however, that congestion was recognized as a serious 
evil in New York City as far back as the first half of the nine- 
teenth century. The evil was not confined to the foreign-born 
population. American-born working-women lived on filthy streets 
in poorly ventilated houses, crowding in one or two rooms, which 
were used both as dwelling and workshop. No better were the 
living conditions of the daughters of American farmers in the mill 
towns of New England. They lived in company houses, half a 
dozen in one attic room, without tables or chairs, or even wash- 
stands. The typical tenement house in the Jewish and Italian 
section of New York today is a decided improvement upon the 
dwellings of the other immigrant races in the same sections a 
generation or two ago. On the other hand, in the South, where 
many of the coal mines are operated without immigrant labor and 
native white Americans are employed, their homes are primitive 
and unsanitary. The cause of bad housing conditions is not racial, 
but economic. Congestion in the cities is produced by industrial 
factors, over which the immigrants have no control. The funda- 
mental cause is the necessity for the wage-worker to live within an 
accessible distance from his place of work. Moreover, the recent 
immigrants are mostly concentrated in great cities, where rent is 
high, while the native American workmen live mostly in small towns 
with low rents. 

Nor are the food standards of the recent immigrant inferior 
to those of native Americans with the same income. Meat is con- 
sumed by the Slav in larger quantities than by native Americans. 
Rent and food claim by far the greater part of the workman's 
wages. It is thus apparent that whatever may have been the immi- 
grant's standard of living in his home country, his expenditure in 
the United States is determined by the prices ruling in the United 
States. Contrary tO' common assertion, the living expenses of the 
native American workman in small cities and rural districts are 
lower than those of the recent immigrants in the great industrial 
centres. It is therefore not the recent immigrant that is able to 
underbid the native American workman, but it is, on the contrary, 
the latter that is in a position to accept a cheaper wage. 

Of course the expenses of a single man are necessarily lower 
than those of a man with a family, and a large proportion of recent 



48o CURRENT ECONOMIC PROBLEMS 

immigrants either are single, or have left their families abroad. 
But, while an unmarried American workman may either save or 
spend the difference, the recent immigrant is obliged tO' save a part 
of his earning's. So when a recent immigrant is seen to deny himself 
every comfort in order to reduce his personal expenses to a mini- 
mum, it is a mistake to assume that he will accept a wage just 
sufficient to provide for his own subsistence. The Italian section- 
hand who' lives on vegetables does not save money for the railroad 
company. The economic interests of the American wage-earner 
are therefore not affected by the tendency of the recent immigrant 
to live as cheaply as possible and tO' save as much as possible. Even 
if he merely sends his money home, his wants are as urgent as 
those of the American laborer who' spends his all, and he must de- 
mand a wage that will enable him to satisfy them. 

Even if the standard oi living O'f the native wage-earners be 
higher, it is often maintained with the earnings of children, whereas 
the Southern and Eastern European immigrants are mo'Stly young 
people whose children have not yet reached working age. 

236. Immigration and Wages^^ 

BY I. A. HOURWICH 

The primary cause which has determined the movement of wages 
in the United States during the past thirty years has been the 
introduction of labor-saving machinery. The effect of the substi- 
tution of mechanical devices for human skill is the displacement 
of the skilled mechanic by the unskilled labdrer. This tendency 
has been counteracted in the United States by the expansion of 
industry ; while the ratio- of skilled mechanics to the total operating 
force was decreasing, the increasing scale of operations prevented 
an actual reduction in numbers. Of course this adjustment did not 
proceed without friction. While, in the long run, there has been 
no displacement of skilled mechanics by unskilled laborers in the 
industrial field as a whole, yet at certain times and places individual 
skilled mechanics were doubtless dispensed with and had to seek 
new employment. The unskilled laborers who replaced them were 
naturally engaged at lower wages. The fact that most of these 
unskilled laborers were immigrants disguised the substance of the 
change— the substitution of unskilled for skilled labor — and made 
it appear as the displacement of highly paid native by cheap immi- 
grant labor. 

"'^Adapted from Immigration and Labor, 23-26. Copyright by G. P. Put- 
nam's Sons (igi2). 



POPULATION AND IMMIGRATION 481 

To prove that imimigration has virtually lowered the rates of 
wages would require a comparative study of wages paid for the 
same class of labor in various occupations before and after the 
great influx of immigrants. This, however, has never been at- 
tempted by the advocates of restriction. In fact, the chaotic state of 
our wage statistics precludes any but a fragmentary comparison 
for different periods. In a general way, however, all available data 
for the period of "the old immigration" agree that the wages of 
unskilled laborers, and even oi some of the skilled mechanics did 
not fully pro'vide for the support of the wage-earner and his family 
in accordance with their usual standards of living. The shortage 
had to be made up by the labor of the wife and the children. 

If the tendency of the new immigration were to lower the rates 
of wages or to retard the advance of wages, it should be expected 
that wages would be lower in great cities where the recent immi- 
grants are concentrated, than in rural districts where the population 
is mostly of native birth. All wage statistics concur, however, in 
the opposite conclusion. Since the United States has become a 
manufacturing country average earnings per worker have been 
higher in the cities than in the country. The same difference exists 
within the same trades between the large and .the small cities. 
Country competition of native Americans often acts as a depressing 
factor upon the wages of recent immigrants. This fact has been 
demonstrated in the clothing industry, in the cotton mills, and in 
the coal mines. 

Furthermore, if immigration tends to depress wages, this ten- 
dency must manifest itself in lower average earnings in states with 
a large immigrant population than in states with a predominant 
native population. No such tendenc}^, however, is discernible from 
wage statistics. As a rule, annual earnings are higher in States 
with higher percentage of foreign-born workers. 

The conditions in. some of the leading industries employing 
large numbers of recent immigrants point to the same conclusions. 
In the Pittsburgh steel mills the rates of w^ages of various grades 
of employees have varied directly with the proportion of recent 
immigrants. The wages of the aristocrats of labor, none O'f whom 
are Southern or Eastern Europeans, have been reduced in some 
cases as much as 40 per cent ; the money wages of the skilled and 
semi-skilled workers, two-thirds of whom are natives or old immi- 
grants, have not advanced notwithstanding the increased cost of 
living, while the wages of the unskilled laborers, the bulk of whom 
are immigrants from Southern and Eastern Europe, have been 
going up. 



482 CURRENT ECONOMIC PROBLEMS 

In the cotton mills of New England the last quarter of the nine- 
teenth century, when the operatives were practically all of the 
English-speaking races, was a period of intermittent advances and 
reductions in wages ; on the whole, wages remained stationary. The 
first years of the present century, up to the crisis of 1908, were 
marked by the advent of the Southern and Eastern Europeans into 
the cotton mills, and by an uninterrupted upward movement of 
wages. The competition of the cheap American labor of the 
Southern cotton mills, however, tends to keep down the wages of 
the Southern and Eastern European, Armenian, and Syrian immi- 
grants employed in the New England mills. 

As a general rule, the employment of large numbers of recent 
immigrants has gone together with substantial advances in wages. 
This correlation between the movements of wages and immigra- 
tion is not the manifestation of some mysterious racial trait, but 
the plain working of the law of supply and demand. The em- 
ployment of a high percentage of immigrants in any section, in- 
dustry, or occupation, is an indication of an active demand for 
labor in excess O'f the native supply. Absence of immigrants is a 
sign of a dull labor market. 



237. The Elevation of the Native Laborer-^ 

BY WIIvUAM S. ROSSITER 

It must not be overlooked that society in the United States has 
been so constructed as to depend upon the continued arrival of 
large numbers of foreigners. In consequence, labor conditions 
prevailing in this nation differ radically from those which prevail 
in most of the countries of Europe, where all economic require- 
ments are met by natives. In England, in France, or in Germanv. 
for example, the man who sweeps the streets, the laborer upon 
public works or in mines, and the woman who cooks or performs 
other domestic duties, are as truly native as the ruler of the nation 
or the statesmen who guide its destinies. In the United States, the 
toan who sweeps the streets, who labors upon public works, in mines 
or on railroads, and the woman engaged in domestic service, if 
white, are almost all of foreign birth. The native stock has learned 
to regard such callings as menial and hence as lowering tO' self- 
respect. Having accepted the education and opportunity which the 
Republic offers them, native Americans appear to consider that they 

"^Adapted from "A Common-Sense View of the Immigration Problem," 
in the North American Review, CLXXXVIII, 368-371. Copyright (1908). 



POPULATION AND IMMIGRATION 483 

are untrue to themselves if they do not avoid humble occupations 
and seek those regarded as an advance in the social scale. There 
is, therefore, a constant movement away from the lower callings 
toward the higher; and occupants for the places thus vacated are 
recruited from foreigners. They in their turn become imbued with 
the American idea, acquire confidence and develop ambition, and 
their children abandon to newer arrivals the callings which support- 
ed their parents. Evidence of this continued movement upward is 
seen in the unwillingness, not only of the nativfe stock but of the 
children of the foreign element, to continue in the servant or so- 
called menial classes, and in the determination on the part of young 
women to become shop girls, telephone-operators, typewriters and 
shop and factory operatives, oftentimes at the penalty of severe 
privation, rather than to go out to service. 

This tendency creates the problem of a constant shortage ot 
workers in the humbler callings. These callings in themselves are 
as necessary in a republic as in an empire. Therefore workers in 
such occupations must in the future, as in the past, continue tO' be 
recruited from abro'ad, or else a large number of native Americans, 
and children of foreign parents, must be contented to labor un- 
complainingly in the lower walks of life. It is possible that the 
fonmer condition may continue indefinitely, but it unquestionably 
tends toward instability, for a nation which permanently meets by 
importation its demand for workers is, in a sense, artificially con- 
structed. 

When the young United States started upon a career of inde- 
pendence, the inhabitants concentrated their efforts upon the de- 
velopment of national resources. They prayed for wealth, and 
Providence gave them the immigrant as the means of securing it. 
After the lapse of a century, our success surpasses the wildest 
dreams of our ancestors; the United States has grown marvelously 
in numbers, and has obtained a prosperity unprecedented in the 
history of the world. 

It is unlikely that our portals, thus far ever open to the aliens of 
all Europe, will be closed to them until it has been conclusively 
shown that the existence of the nation is imperiled by their com- 
ing, or until large numbers of worthy and industrious American 
citizens are obviously deprived of their means of livelihood by the 
arriving throngs of foreigners. At the present time there is nothing 
which points to the realization of these conditions ; and, until there 
is, discussion concerning the restriction is in reality idle. Therefore 
let us be practical, nursing no delusions, and face conditions as 



484 CURRENT ECONOMIC PROBLEMS 

they are. We have always needed the immigrant to aid us in 
amassing wealth, and we shall need him in the future, for the 
United States has now become the great labor mart of the world. 

238. The Industrial Menace of the Immigrant^^ 

BY KDWARD AIvS WORTH ROSS 

The facts assembled by the Immigration Commission shatter 
the rosy theory that foreign labor is drawn into an industry only 
when native labor is not to be had. The Slavs and Magyars were in- 
troduced into Pennsylvania forty-odd years ago by mine operators 
looking for more tractable miners. Agents were sent abroad to 
gather up labor, and frequently foreigners were brought in when a 
strike was on. The first instance seems to have occurred at Drifton 
in 1870 and resulted in the importation of two shiploads of Hun- 
garians. In 1904, during a strike in the coal-fields, near Birming- 
ham, Alabama, many southern Europeans were brought in. In 1908 
"the large companies imported a number of immigrants," so that 
the strike was broken and unionism destroyed in that region. Dur- 
ing the 1907 strike in the iron mines of northern Minnesota, "one 
of the larger companies imported large numbers of Montenegrins 
and other Southeastern races as strike-breakers." 

The hegira of the English-speaking soft-coal miners shows what 
must happen when low-standard men undercut high-standard men. 
The miners of Pennsylvania and West Virginia, finding their unions 
wrecked and the lot growing worse under the floods of men from 
southern and eastern Europe, migrated in great numbers to the Mid- 
dle West and the Southwest. But of late the coal fields of the Mid- 
dle West have been invaded by multitudes of Italians, Croatians, 
and Lithuanians, so that even here American and Americanized 
miners have their backs to the wall. As for the displaced trade- 
unionists who sought asylum in the mines of Oklahoma and Kansas, 
the pouring in of raw immigrants has weakened their bargaining 
power, and many have gone on to make a last stand in the mines 
of New Mexico and Colorado. 

Each exodus left behind an inert element which accepted the 
harder conditions that came in with the immigrants, and a strong 
element that rose to better conditions in the mines and in other occu- 
pations. As for the displaced, the Iliad of their woes has never been 
sung — the loss of homes, the shattering of hopes, the untimely set- 

^"Adapted from "The Old World in the New," in The Century Magazine, 
LXXXVII, 2CH33. Copyright (1913). 



POPULATION AND IMMIGRATION 485 

ting to work of children, the struggle for a new foothold, and the 
turning of thousands of self-respecting men into day laborers, odd- 
job men, down-and-outers, and "hobos." 

During the last fifteen years the flood of gold has brought in a 
spring-tide of prices. Since 1896 the retail cost to Americans of 
their fifteen principal articles of food has risen 70 per cent. Wages 
should have risen in like degree if the workman is to maintain his 
old standard, to say nothing of keeping his place in a social proces- 
sion which is continually mounting to higher economic levels. 
But the workingman has been falling behind in the procession. In 
the soft-coal field of Pennsylvania, where the Slav dominates, the 
coal-worker receives 42 cents a day less than the coal-worker in the 
mines of the Middle West and Southwest, where he does not dom- 
inate. In meat-packing, iron and steel, cotton manufacture, and 
other foreignized industries the inertia of wages has been very 
marked. The presence of the immigrant has prevented a wage ad- 
vance which otherwise must have occurred. 

What a college man saw in a copper mine in the Southwest gives 
in a nutshell the logic of low wages. The American miners getting 
$2.75 a day are abruptly displaced without a strike by a train load 
of five hundred raw Italians brought in by the company and put to 
work at from $1.50 to $2.00 a day. For the Americans there is 
nothing to do but to "go down the road." At first the Italians live 
on bread and beer, never wash, wear the same filthy clothes night 
and day, and are despised. After two or three years they want to 
live better, wear decent clothes, and be respected. They ask for 
more wages, the bosses bring in another train load from the steer- 
age, and the partly Americanized Italians follow the American 
miners "down the road." 

"The best we get in the mill now is greenhorns," said the super- 
intendent of a tube mill. "When they first come, they put their heart 
into it and give a full day's work. But after a while they begin to 
shirk and do as little as they dare." It is during this early innocence 
that the immigrant accepts conditions that he ought to spurn. The 
same mill had to break up the practice of selling jobs by foremen. 
On the Great Northern Railroad the bosses mulcted each Greek 
laborer a dollar a month for interpreter. The "bird of passage" 
who comes here to get ahead rather than to live, not only accepts his 
seven-day week and the twelve-hour day, but often demands them. 
Big earnings blind him to the cost of overwork. It is the American 
or the half-Am6ricanized foreigner who rebels against the eighty- 
four-hour schedule. 



486 CURRENT ECONOMIC PROBLEMS 

When capital plays lord of the manor, the Old World furnishes 
the serfs. In some coal districts of West Virginia the land, streets, 
paths, roads, and miners' cabins, the store, the school, and the 
church are all owned by the coal company. The company pays the 
teacher, and no priest or clergyman objectionable to it may remain 
on its domain. One may not step off the railroad's right of way, 
pass through the streets, visit mine or cabin, without permission. 
There is no place where miners meeting to discuss their grievances 
may not be dispersed as trespassers. Any miner who talks against 
liis boss or complains is promptly dismissed and ejected from the 
35,000 acres of company land. Hired sluggers, known as the 
"wrecking-gang," beat up or even murder the organizer who tries 
to reach the miners. It is needless to say that the miners are all 
negroes or foreigners. 

After an industry has been foreignized, the notion becomes fixed 
in the minds of the bosses that without the immigrants the industry 
would come to a standstill. "If it wasn't for the Slavs," say the 
superintendents of Mesaba mines, "we couldn't get out this ore at 
all, and Pittsburgh would be smokeless. You can't get an American 
to work here unless he runs a locomotive or a steam shovel. We've 
tried it ; brought 'em in carloads at a time, and they left." 

"Wouldn't they stay for $3.00 a day?" I suggested. 

"No, it's not a matter of pay. Somehow Americans nowadays 
aren't any good for hard or dirty work." 

Hard work ! And I think of Americans I have seen in their last 
asylum of the native born, the far West, slaving with ax and hook, 
hewing logs for a cabin, ripping out the boulders for a road, digging 
irrigation ditches, drilling the granite, or timbering the drift — 
Americans shying at open-pit, steam-shovel mining! 

The secret is that with the insweep of the unintelligible bunk- 
house foreigner there grows up a driving and cursing of labor that 
no self-respecting American will endure. Nor can he bear to be 
despised as the foreigner is. It is not the work or the pay that he ' 
minds, but the stigma. That is why, when a labor force has come 
to be mostly Slav, it will be all Slav. But if the supply of raw Slavs 
were cut off, the standards and status of the laborers would rise, 
and the Americans would come into the industry: 

Does the man the immigrant displaces rise or sink? The theory 
that the immigrant pushes him up is not without some color of 
truth. In Cleveland the American and German displaced iron-mill 
workers seem to have been absorbed in other growing industries. 



POPULATION AND IMMIGRATION 487 

They are engineers and firemen, bricklayers, carpenters, structural 
iron workers, steamfitters, plumbers, and printers. Leaving pick 
and wheelbarrow to Italian and Slav, the Irish are now meter-read- 
ers, wire-stringers, conductors, motor-men, porters, caretakers, night- 
watchmen, and elevator men. I find no sign that either the displaced 
workmen or his sons have suffered from the advent of Pole and 
Magyar. On the other hand, in Pittsburgh and vicinity, the new 
immigration has been like a flood sweeping away the jobs, homes, 
and standards of great numbers, and obliging them to save them- 
selves by accepting poorer employment or fleeing to the West. The 
cause of the difference is that Pittsburgh held to the basic industries, 
while in Cleveland numerous high-grade manufacturers started up 
which absorbed the displaced workmen into the upper part of the 
laboring force. 

Unless there is some collateral growth of skill-demanding indus- 
tries, the new immigrants bring disaster to many of the workingmen 
they undercut. The expansion of the industry will create some 
new jobs, but not enough to reabsorb the Americans displaced. Thus 
in the iron mines of Minnesota, out of the seventy-five men kept 
busy by one steam shovel, only thirteen get $2.50 a day or more, and 
$2.50 is the least that will maintain a family on the American stand- 
ard. It is plain that the advent of sixty-two cheap immigrants might 
displace sixty-two Americans, while it would create only thirteen 
decent- wage jobs for them. Scarcely any industry, can grow fast 
enough to reabsorb into skilled or semi-skilled positions the displaced 
workmen. 

Employers observe a tendency for employment to become more 
fluctuating and seasonal because of access to an elastic supply of 
aliens, without family or local attachments, ready to go anywhere 
or to do anything. In certain centers immigrant laborers form, as 
it were, visible living pools from which the employer can dip as he 
needs. Why should he smooth out his work evenly throughout the 
year in order to keep a labor force composed of family men when 
he can always take "ginnies" without trouble and drop them with- 
out compunction? Railroad shops are coming to hire and to "fire" 
men as they need them instead of relying upon the experienced 
regular employees. In a concern that employs 30,000 men the rate 
of change is 100 per cent a year and is increasing. Labor leaders 
notice that employment is becoming more fluctuating, that there are 
fewer steady jobs, and the proportion of men who are justified in 
founding a home diminishes. 



488 CURRENT ECONOMIC PROBLEMS 

239. Immigration and Unionism^" 

BY w. je;tt lauck 

A significant result of the extensive employment of southern 
and eastern Europeans in mining and manufacturing is seen in 
the general weakening and, in some instances, in the entire demor- 
alization of the labor organizations which were in existence before 
the arrival of the races of recent immigration. This condition of 
affairs has been due to the inability of the labor-unions to absorb 
within a short time the constantly increasing number of new ar- 
rivals. The southern and eastern Europeans, as already pointed out, 
because of their tractability, their lack of industrial experience and 
training, and their necessitous condition on applying for work, have 
been willing to accept, without protest, existing conditions of em- 
ployment. Their desire to earn as large an amount as possible 
within a limited time has also rendered the recent immigrant averse 
to entering into strikes which involved a loss of time and a decrease 
in earnings. The same kind of thriftiness has led the immigrant 
wage-earner to refuse to maintain his membership in the labor- 
unions for an extended period and has consequently prevented the 
complete unionization of certain occupations in some cases, and, in 
others, the accumulation of a defense fund by the labor organiz- 
ations. The high degree of illiteracy among recent immigrants 
and the inability of the greater number to speak English have 
also caused their organization into unions by the native Americans 
and older immigrants to be a matter of large expense. The diffi- 
culty of the situation, from the standpoint of the labor organizations, 
is further increased by the conscious policy of the employers of 
mixing races in certain departments or divisions of industries and 
thus decreasing the opportunities for any concerted action because 
of a diversity of language in the operating forces. In mining oper- 
ations, by way of illustration, in many sections, no one race is 
permitted to secure a controlling number in the operating forces 
of a single mine or mining occupation because of the fear that a 
common language would enable them to be readily organized for 
the purpose of seeking redress for real or fancied grievances. 

^"Adapted from "The Real Significance of Recent Immigration," in the 
North American Review, CXCV, 2008-2009. Copyright (1912). 



POPULATION AND IMMIGRATION 489 

F. THE FURTHER RESTRICTION OF IMMIGRATION 
240. The Menace of the Immigrant Farmer^^ 

BY ROBERT D. WARD 

To scatter among our rural communities large numbers of aliens 
whose standards of living are such that they are willing to work for 
the lowest possible wage, is to expose our native farming popula- 
tion to a competition which is distinctly undesirable. In the com 
belt of the west, as Professor T. N. Carver has recently shown, the 
newer immigrants, because of their lower standards of living, have 
been able to put more money into land, buildings, and equipment, 
than the native American farmer; and hence have an advantage in 
the struggle for existence. Scattering our alien population simply 
spreads more widely the evils which result from exposing our own 
people to competition with the lower class of foreigners. Even 
though Italians displace negroes in the agricultural districts of the 
South, the effect will undoubtedly be to cause a migration of the 
negroes to the cities, a result which those familiar with the condi- 
tions of the negroes now congested in cities can not fail to view 
with the greatest alarm. Lastly, the more widely we scatter the 
newer immigrants, the more widespread will be the effect of the 
co'mpetition with the lower grades of aliens in causing a decrease 
in numbers among the older portion of our population. American 
fathers and mothers naturally shrink from exposing their sons and 
daughters to competition with those who are contented with lower 
wages and lower standards of living; and therefore the sons and 
daughters are never born. 

Even if the slum population should be distributed throughout 
the rural sections of the country, congestion in the slums could not 
be relieved, as long as the tide of new immigration flows on un- 
checked. Were it not for the continued influx of new immigrants, 
the problem of the slum burden would not exist. It is quite obvious 
that the more we try to reduce the pressure of competition among 
the alien immigrants in our great cities, the more we shall encour- 
age other immigrants, as ignorant and as poor, tO' come over and 
take the places vacated. Distribution and a reduction in the num- 
ber of our immigrants are both needed. 

^^Adapted from an article in the Popular Science Monthly, LXVI, I73-I7S- 
Copyright (1904). 



490 CURRENT ECONOMIC PROBLEMS 

241. A Protest against Immigration^^ 

Resolved, That the unprecedented movement of the very poor 
to America from Europe in the last three years has resulted in 
wholly changing the previous social, political, and economic aspects 
of the immigration question. The enormous accessions to the ranks 
of our competing wage- workers, being tO' a great extent unem- 
ployed, or only partly employed at uncertain wages, are lowering 
the standard of living among the masses of the working people of 
this country, without giving promise to uplift the great body of 
immigrants themselves. The overstocking of the labor market has 
become a menace to many trade-unions, especially those of the less 
skilled workers. Little or nO' benefit can possible accrue to an in- 
creasing proportion of the great numbers yet coming; they are 
unfitted to battle intelligently for their rights in this republic, to 
whose present burdens they but add others still greater. The fate 
of the majority of the foreign wage-workers now here has served 
to demonstrate on the largest possible scale that immigration is no 
solution of the world-wide problem of poverty. 

Resolved, That we warn the poor of the earth against coming 
to America with false hopes ; it is our duty to inform them that the 
economic situation in this country is changing with the same rapid- 
ity as the methods of industry and commerce. 

242. Consular Inspection as a Method o£ Restriction^^ 

BY BROUGHTON BRANDENBURG 

Immigration must be either controlled and directed or it must 
be abolished, and the last-named alternative is eliminated by com- 
mon sense and considerations of a humane nature. We need the 
immigrants. Our nation owes its strength today to those who have 
crossed the ocean in other years. Our great industries need their 
brawn, our undeveloped regions need their toil, and we can easily 
accept 150,000,000 more human beings as raw material; but they 
must come as raw material, — ^good raw material. That given, our 
civic atmosphere, our conditions, our national spirit must do the 
rest, and patriots must look to the children of the immigrants for 
the results rather than to the immigrants themselves. 

^^These resolutions were adopted by the Executive Board of the United 
Garment Workers in America after an unsuccessful strike in New York in 
1905. The members of this trade are very largely Russian Jews. 

^^Adapted from Imported Americans, 297-301. Copyright by Frederick A. 
Stokes Co. (1904)- 



POPULATION AND IMMIGRATION 491 

Diseased, deformed, or physically insufficient persons are not 
and never can be good raw material, and should not be allowed to 
leave their homes, nor should any members of their families on 
whom they are, or are likely to be, dependent. Convicts, prostitutes, 
persons engaged in questionable pursuits, anarchists, radical social- 
ists, and political agitators should be excluded. 

The true conditions of all such persons is readily ascertainable 
from the civic, police, and military records in the communes of their 
residence, to which can be added the supplemental evidence O'f their 
neighbors and the local officials of the communes. In the com- 
munes of their nativity the truth is known and cannot be hidden. 
At the ports of embarkation combined influences can deceive the 
best officials. At the ports of arrival the hand of the inspector is 
still weaker. 

The conclusion is plain ; seek the grounds on which to deny 
passage to emigrants who wish to come to the United States in the 
villages from which they emianate. 

What seems to me to be the best plan to do this, to keep the 
expense below that which it is at present, and to avoid the oppor- 
tunities which are sure to be presented for wholesale corruption of 
American officials by the transportation interests and by the emi- 
grants themselves, is this : Select emigrants before itinerant boards 
of two, three, or more native-born Americans who speak fluently 
dnd understand thoroughly the language and dialects of the people 
who come before them, — these boards to be on a civil-service basis. 

The long diplomatic delays and ensuing red tape of incorporat- 
ing the privileges of these boards in treaties with the several Euro- 
pean governments can be avoided by temporary operation under 
the present consular system of the United States, and little objec- 
tion would be met with from any of the governments from whose 
domains the immigrants come. 

The sittings of the boards should be announced by advertise- 
ments a sufficient length of time in advance to allow all persons con- 
templating emigration tO' prepare to appear for examination. Ex- 
aminers should be prepared to furnish information as to destinations 
and opportunities, and could, with care, prevent an increase of the 
congestion in the cities of the East. In extremity, regulations could 
be made which would allow them to deny clearance and passage to 
persons desirous of going to districts already over-populated with 
aliens. 

It is easy to see how these visiting boards could promote emigra- 
tion among the classes which are most desirable in northern and 
central Europe, and are now so chary of coming. Families which 



492 CURRENT ECONOMIC PROBLEMS 

have something to lose by being turned back from the United States 
are loath to dispose of their property and make the venture. If 
they knew they were certain of admission before they left their 
homes, a year's time would see the level of the grade of emigrants 
greatly elevated. 

Deportation is the severest punishment which can fall on an 
alien in comparison with anything less than a several years' impris- 
onment, and all admissions to the country should be made proba- 
tionary; the commission of any crime or crimes, and conviction 
therefor, to be followed by punishment and then by deportation. 
Many of the minor crimes committed by aliens are done with the 
intention of getting two or three years in prison in which to learn 
to read and write English and acquire a trade. 

243. An Immigration Program^* 

As a result of the investigation the Commission is of the opin- 
ion that in legislation emphasis should be laid on the following 
principles : 

1. While the American people welcome the oppressed of other 
lands, care should be taken that immigration be such in quantity 
and quality as not to make too difficult the process of assimilation. 

2. Further general legislation concerning the admission of im- 
migrants should be based primarily upon economic or business con- 
siderations touching the prosperity and economic well-being of our 
people. 

3. The measure of the healthy development of a country is not 
the extent of its investment of capital, its output of products, or 
its imports and exports, unless there is a corresponding economic 
opportunity afforded to the citizen dependent upon employment 
for his material, mental, and moral development. 

4. A slow expansion of industry which permits the adaptation 
and assimilation of the incoming labor sttpply is preferable to a 
very rapid industrial expansion which results in the immigration 
of laborers of low standards and efficiency, who imperil the Amer- 
ican standard of wages and conditions of employment. 

The investigations of the Commission show an oversupply of 
unskilled labor in the basic industries of the country as a whole, 
and therefore demand legislation which will at the present time re- 

^^Adapted from A Brief Statement of the Conclusions and Recommenda- 
tions of the Immigration' Commission, 37-40 (1910). 



POPULATION AND IMMIGRATION 493 

strict the further admission of such unskilled labor. It is. desirable 
in making these restrictions that: 

a. A sufficient number be debarred to produce a marked effect 
upon the present supply of unskilled labor. 

b. The aliens excluded should be those who come to this coun- 
try with no intention to become American citizens, but merely to 
save and return to their own country. 

c. The aliens excluded should be those who would least readily 
be assimilated. 

The following methods of restricting immigration have been 
suggested : 

a. The exclusion of those unable to read or write in some lan- 
guage. 

b. The limitation of the number of each race arriving each year 
to a certain percentage of the average of that race arriving during 
a given period of years. 

c. The exclusion of unskilled laborers unaccoinpanied by wives 
or families. 

d. The limitation of the number of immigrants arriving an- 
nually at any port. 

e. The material increase in the amount of money required to 
be in the possession of the immigrant at the port of arrival. 

f. The material increase in the head tax. 

g. The levy of the head tax so as to make a marked discrim- 
ination in favor O'f men with families. 

A majority of the Commission favor the reading and writing 
test as the most feasible single method of restricting undesirable 
immigration. 

244. The Pro and Con of the Literacy Test 

a) The Necessity for the Educational Test^^ 

BY p. i^. HALI. 

If we are to apply some further method of selection to immi- 
grants what shall it be? It must be a definite test. For one trouble 
with the present law is that it is so' vague and elastic that it can be 
interpreted to suit the temper of any of the higher officials who 
may happen to> be charged with its execution. While there are 
many exceptions, those persons who can not read in their own lan- 
guage are, in general, those who are also ignorant of a trade, who 

^^ Adapted from an article in the Annals of the American Academy of 
Political and Social Science, XXIV, 183. Copyright (1904). 



494 CURRENT ECONOMIC PROBLEMS 

bring- little money with them, Avho- settle in the city slums, who 
have a low standard of living and little amhition to seek a better, 
and who do not assimilate rapidly or appreciate our institutions. It 
is not claimed that an illiteracy test is a test of moral character, 
but it would undoubtedly exclude a good many persons who now 
fill our prisons and almshouses, and would lessen the burden on 
our schools and machinery of justice. In a country having uni- 
versal suffrage, it is also^ an indispensable requiremient for citizen- 
ship, and citizenship in its broadest sense means much more than 
the right to the ballot. The illiteracy test has passed the Senate 
three times and the House four times in the last eight years. The 
test has already been adopted by the Conimonwealth of Australia 
and by British Columbia, and would certainly have been adopted 
here long since but for the opposition of the transportation com- 
panies. 

h) Pauperism and Illiteracy^^ 

BY KATE H. CLAGHORN 

The general conclusion to be drawn with regard to the newer 
elements in immigration seem to be, first, that among them the un- 
skilled worker gets along better than the skilled, and the illiterate 
than the literate. This is not to say that skill and education in them- 
selves are a handicap in the industrial contest, or that all racial 
groups with a large proportion of illiterate, unskilled labor get along 
better than those having a high degree of literacy and a larger pro- 
portion of skill. 

Industrial success in this country depends upon adjustment to 
conditions here. Some groups seem to find suitable openings for 
skill and education. But on the whole there is more chance for the 
newcomer into any social aggrega.tion if he is willing to begin at 
the bottom, and in this country, in particular, there is less demand 
for skilled labor from; outside, owing to the fact that the present 
inhabitants are willing to follow these lines of work themselves, but 
are unwilling to occupy themselves in unskilled labor. On the other 
hand the skill, and especially the education, of the newer European 
immigrant has been directed along lines that do not suit American 
conditions. In the evolutionary phrasing, undifferentiated social 
elements can more easily adapt themselves, by specializing, to fit a 
new environment, than can the elements which have been already 
differentiated tO' fit a former environment. 

'^Adapted from an article in the Annals of the American Academy of 
Political and Social Science, XXIV, 197-198. Copyright (1904). 



POPULATION AND IMMIGRATION 495 

Any restriction of immigration, then, that is based on an edu- 
cational quahfication, would be meaningless with respect tO' the 
growth of pauperism. Such a qualification would, among the newer 
immigrants at least, let in the class which though small is the most 
difficult to provide for, and would keep out the class that can best 
provide for itself. 

c) From the Men at the Gate^'^ 

BY IvOUIS S. AMONSON 

We've dug your million ditches, We've given honest labor, 

We've built your endless roads, And liked our humble lot ; 

We've fetched your wood and water, Our children learn the letters 

And bent beneath the loads. Their fathers haven't got. 

We've done the lowly labor We've fled from persecution 

Despised by your own breed ; And served you in your need, 

And now you won't admit us But now you would debar us 

Because we can not read. Because we can not read. 

Most crooks are educated, Good friends, if we are brothers, 

And to the manner born; Why do you raise this test? 

Their white hands show no callous. Will talk, then, till your acres 

They look on us with scorn. And feed your people best? 

Mere learning is not virtue, Your children, trained as idlers. 

The word is not the deed Some workers you must need 

Disdain, then, not your toilers Don't bar our only refuge 

Because they can not read. Because we can not read. 

Your farms are half deserted, 

Up goes the price of bread; 
Your boasted education 

Turns men to clerks instead. 
We bring our picks and shovels 

To meet your greatest need; 
Don't shut the gate upon us 

Because we can not read. 

d) Our Immigration Policy^^ 

In two particulars of vital consequence this bill embodies a 
radical departure from the traditional and long-established policy 
of this country, a policy in which our people have conceived the very 
character of their government to be expressed, the very mission 
and spirit of the nation in respect of its relations to the peoples 
of the world outside their borders. It seeks to all but close entirely 
the gates of asylum which have always been open to those who 

'^From The Square Deal, XII, 165-166 (1913)- 

''^Adapted from the Message of the President of the United States Veto- 
ing H.R. 6060, 63d Cong., 3d sess.. Document 1527, 3-4 (1915). This bill pro- 
vided for the so-called "literacy test" for admission of aliens into this 
country. 



496 CURRENT ECONOMIC PROBLEMS 

could find nowhere else the right and opportunity of constitutional 
agitation for what they conceived to be the natural and inalienable 
rights of men; and to exclude those to whom the opportunities of 
elementary education have been denied, without regard to their 
character, their purposes, or their natural capacity. 

Restrictions like these adopted earlier in our history as a nation, 
would very materially have altered the course and cooled the human 
ardor of our poHtics. The right of political asylum has brought 
to this country many a man of noble character and elevated purpose 
who was marked as an outlaw in his own less fortunate land, and 
who has yet become an ornament to our citizenship and to our public 
councils. The children and the compatriots of these illustrious 
Americans must stand amazed to see the representatives of their 
nation now resolved, in the fulness of our national strength and at 
the maturity of our great institutions, to risk turning men back from 
our shores without test of quality or purpose. It is difficult for me 
to believe that the full effect of this feature of the bill was realized 
when it was framed and adopted, and it is impossible for me to 
assent to it in the form in which it is here cast. 

The literacy test and the tests and restrictions which accompany 
it constitutes an even more radical change in the policy of the nation. 
Hitherto we have generously kept our doors open to all who were 
not unfitted by disease or incapacity for self-support or such per- 
sonal records or antecedents as were likely to make them a menace 
to our peace and order or to the wholesome and essential relation- 
ships of life. In this bill it is proposed to turn away from tests of 
character and of quality and impose tests which exclude and re- 
strict ; for the new tests here embodied are not tests of quality or of 
character of personal fitness, but tests of opportunity. Those who 
come seeking opportunity are not to be admitted unless they have 
already had one of the chief opportunities they seek, the opportunity 
of education. 

WOODROW W1I.SON 

245. Wanted — An Immigration Policy^® 

A friend of ours languidly expatiates upon the folly of answer- 
ing letters. "Lay them away in the drawer," he advises, "and after 
a month or perhaps six months they will have answered themselves." 

In much the same spirit our Congressmen are advised that no 
immigration policy is necessary, that if they will but leave the pend- 

^^ Adapted from an editorial in the New Republic, December 26, 1914, 
lo-ii. Copyright. 



POPULATION AND IMMIGRATION 497 

ing Immigration bill alone, they will not have abjured labor in vain. 
The immigration question, left to itself, will answer itself. The 
alien will become an American, the capables absorbed in our national 
organism, the incapables rejected. Moreover, the countries from 
which our immigrants come will gradually lose their surplus of 
men, and immigration will cease without legislation as our own 
westward migration to an ever-receding frontier ceased of itself 
when our free lands became exhausted. 

This theory of the automatic drying up of the sources of immi- 
gration has been emphasized more strongly than ever since the out- 
break of the war. If the war lasts a year or more millions will be 
killed and other millions will be permanently incapacitated. 

But even though population does decline, it does not follow that 
the immigrating impulse will be lessened. The rapid decrease of the 
Irish population during the half-century after the famine did not 
retard but actually accelerated the immigration. It is not from 
countries with lessened population, but from countries with les- 
sened economic opportunities that population proceeds. And it is 
exactly this lessening of economic opportunities that we have to fear 
as a result of the war. Capital will be dissipated, credit shattered, 
and whole trades, the learning of which has cost years of arduous 
labor, will be for the time discounted. The system will accommo- 
date itself only slowly to the sudden withdrawal, and later the sud- 
den replacement of millions of wage-earners. 

If then, as is to be feared, new armies of ragged and unem- 
ployed are to be enrolled as soon as the armies in uniform are dis- 
banded, if wages fall and life becomes insecure, the outward pres- 
sure upon the huge wage-earning populations of Europe will be 
overwhelming, and those who have the means will seek to emigrate. 
There will be restless millions of former wage-earners in whom the 
fierce emotions of war have made an end to all those industrial am- 
bitions and acquiescences so habitually ignored, and yet vitally es- 
sential, to the mere existence of society. Others, having lost their 
farms or their little shops or houses, or their wives and families, and 
still others who have had their country and their patriotism swept 
away from under the feet will be discontented and mobile. The 
world will be full of foot-loose adventurers, good and bad, filled with 
romantic illusions or else utterly disenchanted, and to these .broken 
lives America will appeal with a freshness of attraction such as she 
has not possessed since the days of '48, when the defeated revolu- 
tionists of Germany turned westward to a land which to them em- 
bodied the liberal principles for which they had been struggling. 



498 CURRENT ECONOMIC PROBLEMS 

And recalling, as we must, the high reverence for the America 
of that day, and this ideal picture of her which may still be found 
in the hearts of boys risking their lives in the cold trenches — re- 
calling this, does it seem sinister to close the doors upon this misery, 
to make the wretchedness of the European our excuse for debarring 
him? It may be sinister. Yet what else has been or can be the 
justification of that policy of self-defense which we seek to express 
in some adequate restriction or regulation of a swelling immigra- 
tion? Wretchedness is infectious, and no contagion is more deadly 
than that of poverty. It is the poverty and the resourcefulness of 
the immigrant, which, handing him over to the exploiter, renders 
him so dangerous to himself and to others. To justify a policy of 
restriction we need only oppose the wisdom of facing problems con- 
cretely and courageously to the folly of leaving things as they are. 
If we are to protect ourselves and the immigrant from exploitation, 
impoverishment, and a fierceness and lawlessness of economic strug- 
gle, which too often brands the victor with an indelible brand and 
leaves the victim crushed and demoralized, we must work out a 
statesmanlike policy of immigration and end our listless method of 
sitting grandiloquently at the gate and letting all enter, irrespective 
of their needs or ours, provided only they have thirty dollars and un- 
granulated eyelids. 

All of which does not mean that we favor the bill at present be- 
fore Congress or even the principle of the literacy test. The value 
or valuelessness of such a test is a matter of proof, and the burden 
of such proof rests squarely upon its advocates. Is this test really a 
test? Is it selective of the best? Or is it merely repressive, a cut- 
ting down of the number of immigrants without regard to merit or 
capacity, as a law excluding red-headed immigrants would cut down 
the number ? Is illiteracy a real disqualification and the fault of the 
immigrant, or is it a part of the very conditions which he has the 
courage to flee? 

We ask these questions without too definitely suggesting our 
answer. We do not, however, conceal our preference for some form 
of immigration policy larger, more constructive, more educative and 
human, and less rigidly restrictive than that which is now proposed. 
Such a policy as we have in mind would enable highly trained and 
highly paid government experts, resident in Europe, to meet the 
aspirant for immigration months or even years before he started on 
his travels, and it would keep the government in touch with him dur- 
ing a period not less than five years after his immigration. In other 
words, the plan which we should like to see elaborated is a federal 



POPULATION AND IMMIGRATION 499 

system of supervision of the alien, of advice, of protection, of edu- 
cation, based upon his special needs and his peculiar legal status, a 
system for his benefit, and incidentally for the benefit of the rest of 
us, a system supported by special taxes paid by aliens, and also, if 
desirable, by contributions out of the general treasury. Such a sys- 
tem could be rendered workable by lengthening to five years the 
period during which the government has the right to deport, though 
in our opinion in each case the right should be subject to an appeal 
by the alien to the courts. Given this right, however, the government 
might exercise over the immigrant the same sort of benevolent 
guardianship that the state now exercises over the legal infant. 
Not only could it provide special facilities for his education, but it 
could make the acquisition of a certain amount of knowledge a 
necessary condition of his continued stay in this country. It might 
advise the alien in every stage of his career, establish interstate em- 
ployment bureaus, and constitute itself a clearing-house for informa- 
tion concerning industrial and social conditions in all places to which 
the immigrant might be tempted to go. It could do much to pre- 
vent the extortion and exploitation of the immigrant, and it could 
diminish that unequal distribution of aliens which leads to conges- 
tion, unemployment, and the aggravation of many social evils. 



G. IMMIGRATION AND OUR FUTURE 
246. The Economics of Immigration**' 

BY FRANK A. Fe;TTER 

The current objections to immigration are mainly based on the 
alleged evil effects to the political, social, and moral standards of 
the community. It is often asserted that present immigration is 
inferior in racial quality to that of the past. Whatever be the truth 
and error mingled in these views, we are not now discussing them. 
Our view is wholly impersonal and without race prejudice. If the 
present immigration were all of the Anglo-Saxon race, were able 
to speak, read, and write English, and had the same political senti- 
ments and capacities as the earlier population, the validity of our 
present conclusions would be unaffected. 

When our policy of unrestricted immigration is thus opposed 
to the interests of the mass of the people, its continuation in a 
democracy where universal manhood suffrage prevails is possible 

■""Adapted from "Population or Prosperity," in The American Economic 
Review, III, No. i, Supplement, 13-16. Copyright (1912). 



500 CURRENT ECONOMIC PROBLEMS 

only because of a remarkable complexity of ideas, sentiments, and 
interests, neutralizing each other and paralyzing action. The Amer- 
ican sentiment in favor of the open door to the oppressed of all 
lands is a part of our national heritage. The wish to share with 
others the blessings of freedom^ and of economiic plenty is the pro- 
duct of many generations of American experience. The policy had 
mainly an economic basis ; land was here a free good on the margin 
of a vast frontier. Most citizens benefited by a growing population. 
But the open door policy is vain to relieve the condition of the 
masses of other lands. Emigration from overcrowded countries, 
with the rarest exceptions, leaves no permanent gaps. Natural in- 
crease quickly fills the ranks of an impoverished peasantry. Lands 
whose people are in economic misery must improve their own in- 
dustrial organization, elevate their standards of living, and limit 
their numbers. If they go on breeding multitudes which find an 
unhindered outlet in continuous migration to more fortunate lands, 
they can at last but drag others down to their own unhappy eco- 
nomic level. 

The pride of immigrants and of their children, sometimes to the 
second and third generations, is another strong force opposing re- 
striction. Immigrants; having become citizens, are proud of the 
race of their origin, and resent restriction as a reflection upon 
themselves and their people. 

A strong commercial motive operates in the most influential 
class of employers in favor of the continuance of immigration. 
From the beginning of our history, proprietors and employers have 
looked with friendly eyes upon the supplies of comparatively cheap 
labor coming from abroad. Large numbers of immigrants or of 
their children have been able soon, in the conditions of the times, to 
become proprietors and employers: Thus was hastened the peopling 
of the wilderness. The interest of these classes harmonized to a 
certain point with the public interest; but likewise it was in some 
respects in conflict with the abiding welfare of the whole nation. 
It encouraged much defective immigration from Europe. 

The immigration from Europe has furnished an ever changing 
group of workers moderating the rate of wages which employers 
otherwise would have had to pay. The continual influx of cheap 
labor has aided in imparting values to all industrial opportunities. 
A large part of these gains have been in the trade, manufactures, 
and real estate of cities as these have taken and retained an ever 
growing share of the immigrants. Successive waves of immigration, 
composed of different races, have been ready to fill the ranks of the 
unskilled workers at meager wages. This continuous inflow has 



POPULATION AND IMMIGRATION 501 

in many industries come to be looked upon as an indispensable 
part of the labor supply. Conditions of trade, methods of manufac- 
turing, prices, profits, and the capital value of the enterprises have 
become adjusted to the fact. Hence results one of those illusions 
cherished by the practical world when it identifies its own profits 
with the public welfare. Without immigration, it is said, the supply 
of labor would not be equal to the demand. It would not at the 
present wages. Supply and demand have reference to a certain 
price. At a higher wage the amount of labor offered and the 
amount demanded will come to an equality. This would tempor- 
arily curtail profits, and other prices would, after readjustment, be 
in a different ratio to wages. Such a prospect is most displeasing 
to the commercial world, quick to see disaster in a disturbance of 
profits, slow to see popular prosperity in rising wages. 

The labor supply coming from countries of denser population 
and with low standards of living creates, in some occupations, an 
abnormally low level of wages and prices. Children can not be 
born in American homes and raised on the American standard of 
living cheaply enough to maintain at such low wages a continuous 
supply of laborers. Many industries and branches of industry in 
America are thus parasitical. A condition essentially pathological 
has come to be looked upon as normal. It is the commercial ideal 
which imposes itself upon the minds of men in other circles. 

What tremendous forces are combined in favor of a policy of 
unrestricted immigration : sentiment and business, generosity, self- 
ishness, laborers, employers. All men are prone to view immigra- 
tion in its details, not in its entirety. They see this or that indi- 
vidual or class advantage, not the larger national welfare. The in- 
terests of capitalists and of the newly arriving immigrants are abun- 
dantly considered ; the interests of the mass of the people now here 
are overlooked. 

247. The Immigrant an Industrial Peasant?*^ 

BY H. G. WElvLS 

Will the reader please remember that I've been just a few weeks 
in the States altogether, and value my impressions at that ! And 
will he, nevertheless, read of doubts that won't diminish. I doubt 
very mnch if America is going to assimilate all that she is taking 
in now ; much more do I doubt that she will assimilate the still 
greater inflow of the coming years. I believe she is going to find 

*^Adapted from The Future in America, 142-147. Copyright by Harper & 
Bros. (1906). 



502 CURRENT ECONOMIC PROBLEMS 

infinite difficulties in that task. By "assimilate" I mean make intel- 
ligently cooperative citizens of these people. She will, I have no 
doubt whatever, impose upon them a bare use of the English lan- 
guage, and give them votes and certain patriotic persuasions, but 
I believe that if things go on as they are going the great mass of 
them will remain a very low class — will remain largely illiterate 
industrialized peasants. They are decent-minded peasant people, 
orderly, industrious people, rather dirty in their habits, and with a 
low standard of life. Wherever they accumulate in numbers they 
present to my eye a social phase far below the level of either Eng- 
land, France, north Italy, or Switzerland. And, frankly, I do not 
find the American nation has either in its schools — which are as 
backward in some States as they are forward in others — in its press, 
in its religious bodies or its general tone, any organized means or 
effectual influences for raising these huge masses of humanity to 
the requirements of an ideal modern civilization. They are, to my 
mind, "biting off more than they can chaw" in this matter. 

Bear in mind always that this is just one questioning individual's 
impression. It seems to me that the immigrant arrives an artless, 
rather uncivilized, pious, goodhearted peasant, with a disposition 
towards submissive industry and rude effectual moral habits. Amer- 
ica, it is alleged, malces a man of him. It seems to* me that all too 
often she makes an infuriated toiler of him, tempts him with dol- 
lars and speeds him up with competition, hardens him, coarsens his 
manners, and, worst crime of all, lures and forces him to sell his 
children into toil. The home of the immigrant in America looks 
to me v/orse than the home he came from in Italy. It is just as 
dirty, it is far less simple and beautiful, the food is no more whole- 
some, the moral atmosphere far less wholesome; and, as a conse- 
quence, the child of the immigrant is a worse man than his father. 

I am fully aware of the generosity, the nobility of sentiment, 
which underlies the American objection tO' any hindrance to immi- 
gration. But either that general sentiment should be carried out 
to a logical completeness and gigantic and costly machinery organ- 
ized to educate and civilize these people as they come in, or it should 
be chastened to restrict the inflow to numbers assimilable under 
existing conditions. At present, if we disregard sentiment, if we 
deny the alleged need of gross flattery whenever one writes of 
America for Americans, and state the bare facts of the case, they 
amount to this: that America, in the urgent process of individual- 
istic industrial development, in its feverish haste to get through 
with its material possibilities, is importing a large portion of the 
peasantry of central and eastern Europe, and converting it into a 



POPULATION AND IMMIGRATION 503 

practically illiterate industrial proletariat. In doing' this it is doing 
a something that, however different in spirit, differs from the slave 
trade of its early history only in the narrower gap between em- 
ployer and laborer. In the "colored" population America has al- 
ready ten million descendants of unassimilated and perhaps unas- 
similable labor immigrants. These people are not only half civilized 
and ignorant, but they have infected the white population about 
them with a kindred ignorance. For there can be no doubt that if 
an Englishman or Scotchman of the year 1500 were to return to 
earth and seek his most retrograde and decivilized descendants, he 
would find them at last among the white and colored population 
south of Washington. And I have a foreboding that in this mixed 
flood of workers that pours into America by the million today, in 
this torrent of ignorance, against which that heroic being, the 
schoolmarm, battles at present all unaided by men, there is to be 
found the possibility of another dreadful separation of class and 
kind, a separation perhaps not so profound but far more universal. 
One sees the possibility of a rich industrial and mercantile aris- 
tocracy of western European origin, dominating a darker-haired, 
darker-eyed, uneducated proletariat from central and eastern Eu- 
rope. The immigrants are being given votes, I know, but that does 
not free them, it only enslaves the country. The negroes were 
given votes. 

These are all mitigations of the outlook, but still the dark 
shadow of disastrous possibility remains. The immigrant comes 
in to weaken and confuse the counsels of labor, to serve the pur- 
poses of corruption, to complicate any economic and social develop- 
ment, above all to retard enormously the development of that na- 
tional consciousness and will on which the hope of the future 
depends. 

248. The Influence o£ the Immigrant on America*^ 

BY WAI^TER E. WKYL 

When we seek to discover what is the exact influence of the im- 
migrant upon his new environment, we are met with difficulties al- 
most insurmountable. Social phenomena are difficult to isolate. 
The immigrant is not merely an immigrant. He is also a wage- 
earner, a city-dweller, perhaps, also an illiterate. Wage-earning, 
city-dwelling, and illiteracy are all contributing influences. Your 

*^ Adapted from "New Americans," in Harper's Monthly Magazine, 
CXXIX, 616-617, 620-622. Copyright (1914). 



504 CURRENT ECONOMIC PROBLEMS 

immigrant is a citizen of a new factory, of the great industrial 
state, within, yet almost overshadowing the political state. Into 
each of our problems — wages and labor, illiteracy, crime, vice, in- 
sanity, pauperism, democracy — the immigrant enters. 

There is in all the world no more difficult, no more utterly be- 
wildering problem than this of the intermingling of races. Already 
twenty million immigrants have come to stay. To interpret this 
pouring of new, strange millions into the old, to trace its results 
upon the manners, the morals, the emotional and intellectual reac- 
tions of the Americans, is like searching out the yellow waters of 
the Missouri in the vast floods of the lower Mississippi. Our immi- 
grating races are many, and they meet diverse kinds of native Amer- 
icans on varying planes and at innumerable contact points. So com- 
plex is the resulting pattern, so multifarious are the threads inter- 
woven into so many perplexing combinations, that we struggle in 
vain to unweave the weaving. 

When we compare the America of today with the America of 
half a century ago, certain differences stand out sharply. America 
today is far richer. It is also more stratified. Our social gamut 
has been widened. There are more vivid contrasts, more startling 
differences, in education and in the general chances of life. We are 
less rural and more urban, losing the virtues and the vices, the excel- 
lences and the stupidities of country life, and gaining those of the 
city. We are massing in our cities armies of the poor to take the 
places of country ne'er-do-wells. We are more sophisticated. We 
are more lax and less narrow. We have lost our early frugal sim- 
plicity, and have become extravagant. We have, in short, created 
a new type of the American, who lives in the city, who reads news- 
papers and even books, bathes frequently, travels occasionally ; a 
man fluent intellectually and physically restless, ready but not pro- 
found, intent upon success, not without idealism, but somewhat dis- 
illusioned, pleasure-loving, hard-working, humorous. At the same 
time there grows a sense of a social maladjustment, a sense of fail- 
ure in America to live up to expectations, and an intensifying desire 
to right a not clearly perceived wrong. There develops a vigorous, 
if somewhat vague and untrained, moral impulse based on social 
rather than individual ethics, unaesthetic, democratic, headlong. 

Although this development might have come about in part at 
least without immigration the process has been enormously accele- 
rated by the arrival on our shores of millions of Europeans. These 
men came to make a living, and they made not only their own but 
other men's fortunes. They hastened the dissolution of old condi- 
tions ; they undermined old standards by introducing new ; their 



POPULATION AND IMMIGRATION 505 

very traditions facilitated the growth of that traditionless quahty of 
the American mind which hastened our material transformation. 

Because of his position at the bottom of a stratified society the 
immigrant does not exert any large direct influence. His indirect 
influence, on the other hand, is increased rather than diminished by 
his position at the bottom of the structure. When he moves, all 
superincumbent groups must of necessity shift their positions. This 
indirect influence is manifold. The immigration of enormous num- 
bers of unskilled "interchangeable" laborers, who can be moved 
about like pawns, standardizes our industries, facilitates the growth 
of stupendous business units, and generally promotes plasticity; The 
immigrant by his very readiness to be used speeds us up ; he accele- 
rates the whole tempo of our industrial life. He changes completely 
the "balance of power" in industry, politics, and social life generally. 
The feverish speed of our labor, which is so largely pathological, is 
an index of this. The arrival of ever fresh multitudes adds to the 
difficulties of securing a democratic control of either industry or 
politics. The presence of the unskilled, unlettered immigrant ex- 
cites the cupidity of men who wish to make money quickly and do 
not care how. It makes an essentially kind-hearted people callous. 
Why save the lives of "wops" ? What does it matter if our industry 
kills a few thousands more or less, when, if we wish, we can get mil- 
lions a year from inexhaustible Europe? Immigration acts to de- 
stroy our brakes. It keeps us, as a nation, transitional. 

Of course this transitional quality was due partly to our virgin 
continent. There was always room in the West. Immigration, how- 
ever, intensified and protracted the development. Each race had to 
fight for its place. Natives were displaced by Irish, who were dis- 
placed in turn by Germans, Russians, Italians, Portuguese, Greeks, 
Syrians. Whole trades were destroyed by one nation and conquered 
by another. The old homes of displaced nations were inhabited by 
new peoples ; the old peoples were shoved up or down, but, in any 
case, out. Cities, factories, neighborhoods changed with startling 
rapidity. Connecticut schools, once attended by descendants of the 
Pilgrims, became overfilled with dark-eyed Italian lads and tow- 
headed Slavs. Protestant churches were stranded in Catholic or 
Jewish neighborhoods. America changed rapidly, feverishly. The 
rush and recklessness of our lives were increased by the mild, law- 
abiding people who came to us from abroad. 

There was a time when all these qualities had their good features. 
So long as we had elbow room in the West, so long as we were 
young and growing, with a big continent to make our mistakes in, 
even recklessness was a virtue. But today America is no longer 



So6 CURRENT ECONOMIC PROBLEMS 

elastic ; the road from bottom to top is not so short and not so unim- 
peded as it once was. We cannot any longer be sure that the immi- 
grant will find his proper place in eastern mills or on western farms 
without injury to others — or to himself. 

The time has passed when we believed that mere numbers was 
all. Today, despite the whole network of Americanizing agencies, 
we have teeming, polyglot slums, and the clash of race with race in 
sweatshop and factory, mine and lumber camp. We have a mixture 
of ideals, a confusion of standards, a conglomeration of clashing 
views on life. We, the many-nationed nation of America, bring the 
Puritan tradition, a trifle anaemic and thin, a little the worse for 
disuse. The immigrant brings a Babel of traditions, an all too 
plastic mind, a willingness to copy our virtues and our vices, to 
imitate us for better or for worse. All of which hampers and delays 
the formation of national consciousness. 

From whatever point we view the new America, we cannot help 
seeing how intimately the changes have been bound up with our 
immigration, especially that of recent years. The widening of the 
social gamut becomes more significant when we recall that with un- 
restricted immigration our poorest citizens are periodically recruited 
from the poor of the poorest countries of Europe. Our differences 
in education are sharply accentuated by our enormous development 
of university and high schools at one end, and by the increasing 
illiteracy of our immigrants at the other. 

America today is in transition. We have moved rapidly from 
one industrial world to another, and this progress has been aided and 
stimulated by immigration. The psychological change, however, 
which should have kept pace with this industrial transformation, 
has been slower and less complete. It has been retarded by the very 
rapidity of our immigration. The immigrant is a challenge to our 
highest idealism, but the task of Americanizing the extra millions of 
newcomers has hindered progress in the task of democratizing 
America. 

H. THE QUALITY OF POPULATION j 

249. The Breeding of Men*^ 

BY PI.ATO 

"Then tell me, Glaucon, how is this result to be attained? For I 
know that you keep in your house both sporting dogs and a great 
number of game birds. I conjure you, therefore, to inform me 

"Adapted from The Republic, V, 4S9-460 (385 b. c). 



POPULATION AND IMMIGRATION 507 

whether you have paid any attention to the breeding of these 
animals." 

"In what respect?" 

"In the first place, though all are well bred, are there not some 
which are, or grow to be, superior to the rest ?" 

"There are." 

"Do you then breed from all alike, or are you anxious to breed 
as far as possible from the best?" 

"From the best." 

"And if you were to pursue a different course, do you think that 
your breed of birds and dogs would degenerate very much?" 

"I do." 

"Good heavens ! my dear friend," I exclaimed, "what very first- 
rate men our rulers ought to be, if the analogy holds with respect to 
the human race." 

"Well, it certainly does." 

"The best of both sexes ought to be brought together as often as 
possible, and the worst as seldom as possible, and the issue of the 
former unions ought to be reared, and that of the latter abandoned, 
if the flock is to attain first-rate excellence." 

"You are perfectly right." 

"Then we shall have to ordain certain festivals at which we shall 
bring together the brides and bridegrooms, and we must have sacri- 
fices performed, and hymns composed by our poets in strains appro- 
priate to the occasion; but the number of marriages we shall place 
under the control of the magistrates, in order that they may, as far 
as they can, keep the population at the same point, taking into con- 
sideration the effects of war and disease, and all such agents, that 
our city may, to the best of our power, be prevented from becoming 
either too great or too small." 

250, Derby Day and Social Reform** 

Sir : Which is wrong — the breeder of race horses or Mr. Lloyd- 
George? Would racing men do better with their animals if they 
adopted all the methods which Parliament has imposed upon us in 
recent years as the right way to improve the efficiency of the human 
race? How would it be if they swept up the whole equine progeny 
of the country, each generation as it came, and applied social reform 
to it — if they provided it with stables sanitarily inspected, if they 

**A letter published in the London Times, May 26, 1909. 



5o8 CURRENT ECONOMIC PROBLEMS 

caused all its units to pass under the hands of certified trainers, if 
they pensioned off the old hacks, and provided bank holidays for the 
young, and, finally, if they left the whole question of the breeding 
of the beasts to chance? If English racing men adopted our govern- 
mental system, is it not certain that English race horses would be 
beaten everywhere by horses bred by selection ? Yet no one suggests 
any interference with the breeding of the human race. It is only 
royal marriages that have to be publicly approved. My suggestion 
that the same kind of interference should be applied to the mar- 
riages of peers has not exactly "caught on." In their case the hered- 
itary principle is accepted but not scientifically applied. 

Not only does Parliament in its so-called wisdom fail to apply 
science to the productio.n of hereditary legislators, but in all recent 
social legislation it has actually penalized the fitter classes in society 
in the interests of the less fit. The least fit in the country are the 
old people who have failed to provide any savings against their old 
age, and that large class of cheats who manage to pretend that they 
are in that case. An as yet uncounted number of millions sterling 
is now to be taken year after year from the fitter classes and doled 
out to these unfittest. No one can tell how many children that would 
have been born to these fitter parents will now have to go unborn. 
The old people used to be supported by their relations, who presum- 
ably inherited a like unfitness; those relatives, now indirectly en- 
dowed, can now produce more children in place of the fitter children 
whose entry into the world has been blocked. All so-called social 
legislation tends to act in the same way. The birth rate of the fitter 
is diminishing year by year and we calmly sit by and watch the con- 
sequent degeneration of our race with idle hands. We take the 
human rubbish that emerges and give it compulsory education, hous- 
ing acts, inspection of all sorts and at all seasons, at the expense of 
the fitter class, and imagine that better results will ensue than if we 
left the whole business alone. Are we right? Or are the horse 
breeders right? They have demonstrably improved the race of 
horses, and with great rapidity. The old system of "let alone" also 
improved, though more slowly, the race of men. It is only the mod- 
ern system of penalizing the fit for the sake of the unfit that seems 
to be put in action simultaneously with, if it does not cause, an ob- 
served race-degeneration. 

I am. Sir, yours faithfully, 

Martin Conway 



POPULATION AND IMMIGRATION 509 

251. Eugenics and the Social Utopia''^ 

BY george; p. MUDGE 

With regard to man, it is now clear that what medicine, social 
reform, legislation, and philanthropy have failed to accomplish can 
be achieved by biology. Tell the student of genetics what type of 
nation we desire, within the limits of the characters which the nation 
already possesses, and confer upon him adequate powers, and he 
will evolve it. It is not too much to say that if he were instructed 
to evolve a "fit" nation — that is, one of self-restrained and self-sup- 
porting individuals — in the course of a few generations there would 
be neither workhouses, hospitals, unemployables, congenital crim- 
inals, or drunkards. 

Students of eugenics will turn with interest to the concluding 
pages of Professor Bateson's book ; there he deals with the sociolog- 
ical application of the science of genetics. We commend every ad- 
vocate of social panaceas and of legislative interference with natural 
processes to read this part of the book. In a few well-chosen sen- 
tences he gives expression to the judgment of every biologist, alike 
of the present and the past, who has given to social problems ade- 
quate and unbiased thought. For nothing is more evident to the 
naturalist than that we cannot convert inherent vice into innate vir- 
tue, nor change leaden instincts into golden conduct, nor "transform 
a sow's ear into a silken purse," by any known social process. Our 
vast and costly schemes of free compulsory education, of county 
council scholarships and evening classes, which are among these 
social processes supposed to possess the magic virtue of trans- 
forming the world into a fairy land, may be a delusion and a danger. 
And so, too, may be all the other well-intentioned but costly panaceas 
that harass, and tax, and eventually destroy the fit in order to at- 
tempt — for they can never achieve — the salvation of the unfit. 

252. Immigration and Eugenics**' 

BY WALTliR t. WEYI, 

We must not forget that these men and women who file through 
the narrow gates at Ellis Island, hopeful, confused, with bundles 
of misconceptions as heavy as the great sacks upon their backs — we 

*^ Adapted from a review of Bateson's Mendel's Principles of Heredity, 
in The Eugenics Review, I, 137 (1909). 

^^Adapted from "New Americans," in Harper's Monthly Magazine, 
CXXIX, 615-616. Copyright (1914). 



Sio CURRENT ECONOMIC PROBLEMS 

must not forget that these simple, rough-handed people are the an- 
cestors of our descendants, the fathers and mothers of our children. 

So it has been from the beginning. For a century a swelling 
human stream has poured across the ocean, fleeing from poverty in 
Europe to a chance in America. One race after another has knocked 
at our doors, been given admittance, has married us and begot our 
children. We could not have told by looking at them whether they 
were to be good or bad progenitors, for racially the cabin is not 
above the steerage, and dirt, like poverty and ignorance, is but skin 
deep. A few hours and the stain of travel has left the immigrant's 
cheek ; a few years and he loses the odor of alien soils ; a genera- 
tion or two, and those outlanders are irrevocably our race, our 
nation, our stock. 

That stock a little over a century ago was almost pure British. 
Despite the presence of Germans, Dutch, French, and Negroes, the 
American was essentially an Englishman once removed, an Eng- 
lishman stuffed with English traditions, prejudices, and stubborn- 
nesses, reading English books, speaking English dialects, practicing 
English law and English evasions of law, and hating England with a 
truly English hatred. Even after immigration poured in upon us, 
the English stock was strong enough to impress upon the immi- 
grating races its language, laws, and customs. Nevertheless, the in- 
coming millions profoundly altered our racial structure. Today over 
thirty-two million Americans are either foreign born or of foreign 
parentage. America has become the most composite of nations. 

We cannot help seeing that such a vast transfusion of blood 
must powerfully affect the character of the American. What the 
influence is to be, however, whether for better or for worse, is a 
question most baffling. Our optimists conceive the future American, 
the child of this infinite intermarrying, as a glorified, synthetic per- 
son, replete with the best qualities of all the component races. He 
is to combine the sturdiness of the Bulgarian peasant, the poetry of 
the Pole, the vivid artistic perception of the Italian, the Jew's in- 
tensity, the German's thoroughness, the Irishman's verve, the ten- 
acity of the Englishman, with the initiative and versatility of the 
American. The pessimist, on the other hand, fears the worst. 
America, he believes, is committing the unpardonable sin ; is con- 
tracting a mesalliance, grotesque and gigantic. We are diluting our 
blood with the blood of lesser breeds. We are suffering adultera- 
tion. The stamp upon the coin — the flag, the language, the national 
sense — remains, but the silver is replaced by lead. 

All of which is singularly unconvincing. In our own families, 
the children do not always inherit the best qualities of father and 



POPULATION AND IMMIGRATION 511 

mother, and we have no assurance that the children of mixed 
races have this selective gift and rise superior to their parent stocks. 
Nor do we know that they fall below. We hear much about "pure" 
races and "mongrel" races. But is there in all the world a pure race? 
The Jew, once supposed to be of Levitical pureness, is now known to 
be racially unorthodox. The Englishman is not pure Anglo-Saxon, 
the German is not Teutonic, the Russian is not Slav. To be mongrel 
may be a virtue or a vice. We do not know. The problem is too 
subtle, too elusive, and we have no approved receipts in this vast 
eugenic kitchen. Intermarrying will go on whether we like it or 
loathe it, for love laughs at racial barriers and the maidens of one 
nation look fair to the youth of another. Let the kettle boil, and let 
us hope for the best. 

253. The Rationale of Eugenics*^ 

BY JAMES A. FIELD 

A review of what has been accomplished in the field of eugenics 
during the last decade clearly reveals that most of the solid writing 
and of the really scientific and useful work has come from the 
biologists. The competent student of economic and social questions 
has rendered little aid. Perhaps until now his abstention from the 
discussion has been wise. Experts were not needed to repeat the 
memorable suggestion that a civilization which should acquire con- 
trol over the qualities of the human breed might thereby control 
human welfare also. That suggestion, vital in itself, has been 
readily enough kept alive by the conviction of the inexpert that any- 
thing is the better for tinkering ; meanwhile, the biologists have been 
coming more and more to the conclusion that whoever can deter- 
mine marriage selection in the present will determine, within large 
limits, the physique and intellect of the future, and will become in a 
new sense the maker of history. But in proportion as the biologist 
foreshadows the physical possibilities of heredity and selection, the 
want grows for wisdom with which to utilize them. What sort of 
history, then, is best worth the making? What sort of history does 
it lie within our power to bring to pass? Is this momentous mar- 
riage selection, from motives half rational, half mystical, in their 
veneration of the continuance of life, to prevail in spite of popular 
ignorance and passion? Or, leaving this question of practicability 
for experience to decide, is it after all sensible to burden the present 
generation with concern for generations of the future whose needs 

*'^ Adapted from "The Progress of Eugenics," in the Quarterly Journal of 
Economics, XXVI, 61-67. Copyright (1911). 



512 CURRENT ECONOMIC PROBLEMS 

we can hardly foretell ; and, in subservience to the science of the day, 
to repudiate instinct older than all human experience by "falling in 
love intelligently" ? We have need of a social philosophy to tell us 
how far eugenic reforms are reasonable and worth while. 

Even in its broadly biological aspects eugenics is involved in the 
long-standing demarkation dispute over the respective jurisdictions 
of man's artificial control and the unmodified course of natural evo- 
lution. Less than twenty years ago one of the greatest of biologists, 
writing on this very subject, declared in no uncertain terms his dis- 
belief in the practice of artificial selection as a means of human bet- 
terment. Knowledge has grown, no doubt, since Evolution and 
Bthics was written, and new discoveries have gone far to discredit 
Huxley's belittlement of the potency of human selective agencies. 
The details of the biological mechanism by which changes are ef- 
fected have become far better known. More dubious is the question 
how much advance has been made toward a wise guidance of such 
agencies. For Huxley, there was "no hope that mere human beings 
will ever possess enough intelligence to select the fittest." Possibly 
the social consciousness of a people is an abler guide than he recog- 
nized. Perhaps, although the fittest state of society is beyond our 
perception, we may achieve by means of eugenic selection a succes- 
sion of experimental changes which seem to us for the better. But 
still the order of nature decrees that eugenic experiments made in 
haste are repented at leisure. The eugenist who modifies the race 
type in the present predetermines for better or worse the mental and 
physical endowment of distant posterity. In the final analysis, eu- 
genics, like other attempts at lasting reform, must move with the 
stream of processes which preceded human intervention and limit it 
still. While in such a stream a steered course may well be better 
than mere drifting, the eugenist in action must always proceed with 
the caution of one who reckons with the inscrutable. 

If the task of eugenics were to establish a new aristocracy of 
inborn ability, the prospect of success would be less obscure. The 
historical institutions of ruling castes and hereditary nobilities have 
shown that the special capacity which in one' generation after an- 
other can seize upon and retain for itself special opportunity has 
long been competent to raise the family line of its possessors above 
their less favored fellowmen. Now modern biology, from a new 
standpoint and with new significance, reasserts the privilege of birth. 
It is not surprising, therefore, that writers arguing for the eugenic 
selection which shall perpetuate and intensify exceptional ability, 
have virtually proposed an aristocratic social order of a novel kind. 
But every preferment of the abler members of a community is tanta- 



POPULATION AND IMMIGRATION 513 

mount to a degradation of the less gifted. To create an exclusive 
caste founded on eugenic superiority would be to intensify the un- 
happiness of such persons as are already inferior. The principle of 
the survival of the fittest normally involves wholesale sacrifices of 
the unfit ; but such unmitigated rigor of selection does not commend 
itself as a humane method of social amelioration. Nor is the temper 
of the times favorable to aristocracies of any sort. It calls for a 
general betterment of the whole mass of mankind. 

Can eugenics bring to pass this universal improvement? Prob- 
ably many a devoted follower of the cause has assumed that if its 
benefits can be realized by any they might be extended to all. Such 
was the vision of Greg: "Every damaged and inferior tempera- 
ment might be eliminated, and every special and superior one be 
selected and enthroned, till the human race, both in its manhood and 
its womanhood, became one glorious fellowship of saints, sages, and 
athletes ; till we were all Blondins, all Shakespeares, Pericles, Soc- 
rates, Columbuses, and Fenelons." But to hold such opinions is to 
ignore the relativity of success and to miss the very meaning of em- 
inence. In a world of Blondins a tightrope walker would command 
no profit or applause. A world of great teachers would lack pupils 
to be taught. The unknown continent which everyone had found 
could hardly immortalize its multitudinous discoverers. Nor could 
any one master-dramatist make mankind his audience so long as all 
clamored with equal right for hearing. Unfortunately, too often we 
overlook, in our projects for reform, the comparative character of 
individual attainments and individual happiness. We bemoan the 
rarity of greatness, forgetting how largely the exceptional individ- 
uals whom we call great are great because they are exceptional. If, 
then, we are to elevate the whole community, we must work with a 
standard free from the element of invidiousness ; for no social re- 
form can achieve a general improvement of men's positions relative 
to the positions of their fellowmen. 

Apparently, then eugenic selection is concerned not with the con- 
ditions of eminence but with the conditions of efficiency. It must 
work for the internal efficiency which we roughly call sanity and a 
good constitution, and for the external efficiency which enables an 
individual, regardless of the comparative efficiency of other individ- 
uals, to make steady progress in forcing his non-human surround- 
ings into conformity with his needs. Doubtless the distinctions here 
applied are indefinite. For instance, the personal advantages of 
health and strength are diminished if equal physical vigor becomes 
the possession of all. Unusual prowess in exploiting external phy- 
sical resources has notoriously been among the most potent causes of 



514 CURRENT ECONOMIC PROBLEMS 

inequality. Yet, in a civilization which already ministers by pallia- 
tives to ill-health ; and in which the distributed burden of caring for 
the incompetent almost certainly drags more heavily on those who 
are stronger than would the potential competition which incompe- 
tency now holds in check — in such a civilization, the promise of 
gain to come from the eradication of feeble-mindedness, or insanity, 
or the proneness to consumption would outweigh any new stress of 
circumstance which it would involve. And with this alleviation of 
the miseries from within might come augmented economic effi- 
ciency, not of the few but of the many: a general and continuous 
advance in those characteristics of body and mind which make for 
man's larger control of heretofore reluctant gifts of nature. 

If this sketching of the possibilities is even roughly true, it calls 
again for the verdict of the biologist. But it is by no means only the 
biologist whose judgment is required. Again and again, in the 
light of biological discoveries a more adequate answer must be 
sought to that crucial question, the significance of which the biol- 
ogists have mostly failed to comprehend : Granted that by rational 
marriage selection certain recombinations of human characteristics 
can be effected at will, what eugenic policy promises the maximum 
increase of human welfare? To aid in answering this question the 
economist is needed. For health and strength and intellect work 
out the good or ill fortunes of their possessors according to the ways 
of economic civilization, and not by process of brute struggle for 
existence. Eugenics is not mere biology. The problems of eugenics 
are problems of human society. 



X 

THE PROBLEMS OF ECONOMIC INSECURITY 

That "fortune is fickle," that "life is insecure," and that "no one knows 
what a day may bring forth," are among the oldest and the best attested 
generalizations from human experience. The problems associated with 
insufficiency of food, accident, sickness, and old age — with sowing where one 
never reaps — we have, quite proverbially, always had with us. But under 
modern industrial conditions, in a developing system, such questions are so 
closely related to the whole complex of life that it is necessary for us, col- 
lectively as well as individually, to "take thought for the morrow." 

The machine system, production on a large scale, pecuniary competition, 
dependence on distant and future markets, the rapid development of tech- 
nique, the delicate organization of the "industrial machine" and the scheme 
of prices, the currents which carry the shock of disturbance throughout the 
system, the alternation of business optimism and pessimism, the violent rhythm 
of the economic cycle, the onward sweep into an unknown future — all of 
these things prevent us from adequately guarding against what the morrow 
has in store. The insecurity of capital is attested by failures to find pur- 
chasers for goods, by falling dividends, by business failures, by the sudden 
disappearance of capital values. But these things were discussed in connec- 
tion with the economic cycle. It is the insecurity of the laborer wl.jch con- 
cerns us here. 

To grasp the problem as a whole we must appreciate the peculiar posi- 
tion of the laborer in the machine system. This can best come from con- 
trasting, say, the villein on the manor ' with the modern industrial "hand." 
Custom granted to the former the use of the same land year after year, 
exacted from him a fixed rent, forbade his dispossession, and made his 
position permanent. He and the land formed an inseparable industrial unit : 
there was always something for him to work with ; what he produced he 
had. The problem of want might indeed confront him; but it was associated 
with a raid of an alien feudal lord upon his manor or the. failure of the 
elements to grant a full yield from the earth. The group to which he belonged 
was established upon a "personal" basis, and was possessed of a spirit of 
solidarity. He possessed as long as they possessed. 

In modern industrial society, on the contrary, there is no permanent 
association of the laborer with the instruments of production. He secures 
equipment with which to work by means of a "contract," expressed in pecun- 
iary terms, and running for a stipulated period. He owns no equities in the 
property with which he works. When the contrast expires, it need not be 
renewed. No other property owner is compelled to make a new contract 
with him. The bait of higher wages, drawing him from place to place, is 
likely to prevent his identification with a group animated by a spirit of 
solidarity. He has the tremendous advantages which come from freedom of 
movement and the chance to take advantage of the best opportunity which 
presents itself. He has the disadvantages which attend short-time contracts. 
These last are outgrowths of two sets of conditions ; first, those affecting em- 
ployment, causing it to increase or decrease, and to pay higher or lower 
wages ; and second, his own industrial powers, which may be partially irn- 
paired or even totally collapse, from accident or sickness to which he is 
exposed. When they are gone, as they will eventually be in old age, he has 
no respectable surety of support. 

515 



5i6 



CURRENT ECONOMIC PROBLEMS 



This larger problem involves several minor problems, very closely con- 
./ected, and yet possessed each of its peculiar aspects. Unemployment, per- 
haps the most difficult of these, is closely associated with the short-time 
contract. With changing business conditions, the employer, who is dependent 
upon pecuniary returns, may find it impossible to renew old contracts. 
Changes in technique, the disappearance of his market, and a thousand other 
causes may contribute to this result. It is rendered more serious by the 
ebb and flow in the demand for labor, which is closely associated with the 
rhythm of the business cycle. Unfortunately the supply of labor, unlike 
currency, is not possessed of the necessary elasticity to meet the changing 
conditions. The risks are too unpredictable for insurance to become more 
than a palliative. The solution of the larger problem is, in general, associated 
with that of the other problems of the cycle. 

Industrial accidents occur because we have not yet learned absolutely 
to control the dangerous natural forces which we have pent up in our 
machines, and because we have not learned properly and exactly to adjust 
our movements to these huge engines of production — and destruction. In 
general their causes are resident in the system as a whole and cannot be 
directly imputed to "individuals." Unfortunately, however, their consequences 
may be quite concentrated. They are no respecters of persons, and are as 
likely as not to rob of their productive abilities laborers who have families 
dependent upon them. The problem involves ; first, a prevention of industrial 
accidents, attended as they are with great losses of productive power; and 
second, the devising of some legal measure to compensate the injured and 
innocent party for his loss. 

Sickness and old age are serious social problems. The former, through 
the absence of the laborer and the breaks in the productive process which his 
absence entails, piles up huge economic costs. Unless assistance be rendered 
at the time of stress, sickness may lead to a great loss of productive power 
and in many cases to permanent dependence. Provision for old age, under 
short-time labor contracts, is difficult and rarely is adequate. But, even if 
individually made, there is grave doubt whether the saving involved does 
not deplete the income to such an extent as seriously to cripple efficiency. 
At any rate the feeling of insecurity is likely to hinder the laborer's perform- 
ance of his work. A scheme of insurance should be able greatly to reduce 
the wastes incident to both of these universal occurrences. What is needed 
is a long-time calculation, based on the whole life of the laborer, not a series 
of short-time calculations such as labor-contracts make necessary. 

Finally there is the problem of insecurity due to wages too low to yield 
a decent standard of living. There is just now a disposition to try to solve 
this problem by the establishment of "minimum-wage scales." The problem 
is one of the most difficult in the field of economics. If the "natural," or com- 
petitive, wage is to be set aside as too low, what standard can be found to 
determine the proper wage? Will there not be evasion of laws prescribing 
"artificial" wages? To prevent this, will not the government be compelled 
to regulate prices, service, hiring and discharge, accounting systems, dis- 
cipline, etc? Will not the experience of the government in attempting to 
prevent rebates be duplicated? What will be the influence of regulation on 
the investment of capital in the industries involved? To what lengths, and 
to the adoption of what new social schemes, will this policy carry us? Can 
the project be made to succeed without a supplementary control of the supply 
of labor? Would it not be better to try to solve the question through an 
attempt to decrease the numbers of the lower class, and through technical 
education? It seems, from the study which we made above of "artificial 
price determination," that prices seriously at variance with competitive 
prices cannot be enforced. Such an attempt would have far greater chances 
of success, if accompanied by efforts to restrict the supply or increase the 
efficiency of labor. A conscious "control of births," a restriction of immigra- 
tion, vocational guidance, and compulsory technical training should do much 



ECONOMIC INSECURITY 517 

to make the minimum wage effective. If we can wait for slowly changing con- 
ditions to produce results, and if we do not force a single proposal to carry 
the whole burden of raising low wages, eventually we should expect success. 
The problem of economic insecurity occurs in its most aggravating form 
among unskilled and unorganized laborers. State aid will help them ; but 
it will not free them from the necessity of working out their own salvation. 
Skilled and organized laborers should be able to solve their own problem 
through their effective device of collective bargaining. 

A. INSECURITY UNDER MODERN INDUSTRIALISM 
254. Competition and Personal Insecurity^ 

BY THOMAS KIRKUP 

Perhaps the most painful feature of the working man's lot is the 
insecurity of his position. During the long periods of depression 
work is scarce and precarious, and he must go where he has a chance 
of finding it. At all times the changes in the labor market are so 
great and unexpected that he can hardly calculate upon a settled ex- 
istence. Continual fluctuations of trade force him to move. He has 
no control, or only a very partial control, over the economic and 
social conditions under which he must work. A settled home, a 
piece of land for a garden, a fixed outlook for his family, and a 
reasonable prospect of a happy and comfortable old age, untroubled 
by the horror of losing such savings as he may have made, through 
want of employment, and of ending his days in a workhouse — these 
for a large proportion of the workmen in the industrial centers are 
unattainable blessings. Yet they are unquestionably such as every 
decent and honorable working man has a right to expect. 

This condition of insecurity under the existing system of com- 
petition, however, is by no means a special evil of the workman. 
It is the common lot of all who are involved in it, and, not the least, 
of the capitalists who are exposed to ruin by it. The conditions of 
industry are not only beyond the control of the workmen who serve 
under the capitalistic system. They are beyond the effective con- 
trol also of the individual capitalists whose function it is to direct 
them, so that competition frequently degenerates into disorder, and 
into an exterminating war carried on with all the weapons permit- 
ted by the law, and with many not permitted by law — underselling, 
adulteration, fraud, bribery, oppression of labor. In times when in- 
dustry is expanding, this may not be so apparent, but when trade 
becomes dull, stationary, or retrograde, the struggle grows painful, 
and to many of the competitors disastrous. In this struggle many 

'^Adapted from An Inquiry into Socialism, 68-74. Copyright by Longmans, 
Green & Co. (1907). 



5i8 CURRENT ECONOMIC PROBLEMS I 

capitalists are ruined, dragging down with them numbers of work- 
men who have no control of their economic position, and are help- 
less under the calamity. 

This insecurity is essentially connected with the speculative char- 
acter of the competitive business. As production is so often carried 
on for a market of unknown and incalculable extent, and for prices 
which, even if obtained, cannot be accurately foreseen, uncertainty 
must very greatly prevail, and the speculative spirit must power- 
fully affect the general course of business. This spirit of specula- 
tion culminates in the great Exchanges, disturbs legitimate trade, 
and not infrequently throws into insecurity, panic, and disorder the 
industrial operations of the country, sometimes of the civilized world. 

In the history of the capitalistic system nothing is so extraor- 
dinary as the rapid development of mechanical power. It is only 
natural, when the prizes of success are so enormous and the penal- 
ties of failure so severe, that human ingenuity and energy should 
be wonderfully quickened. This development of industrial power 
still continues in every country where modern methods have been 
introduced. But there is a serious evil connected with it. This is 
the fact that labor, which is one of the greatest factors of produc-, 
tion, is thrown out of employment through this excessive develop- 
ment of machinery. But as the laborers form the bulk of the. 
population and should be by far the largest purchasers, the very 
force which tends to over-fill the markets tends also to restrict the 
purchasing power of the majority of the community. Thus industry 
under the competitive system runs and must run in a vicious circle. 

All the phenomena of competitive anarchy find their worst de- 
velopment in the great commercial and industrial crises which con- 
tinually recur, and now threaten to become not only universal but 
chronic. It is unnecessary to recount the familiar phenomena of an 
industrial crisis. We have a multitude of competing capitalists of 
every class with a market which may be as wide as the world. Each 
has a vague prospect of vast possibilities of gain before him, and 
when trade is favorable each is anxious to make the most of his 
opportunities. Machinery is improved, establishments are enlarged, 
and better organized, production grows lively, vigorous, and rapid 
in an ever increasing ratio till it becomes an impetuous and feverish 
rush. Before long the over-filled markets are unable to take off the 
enormous supply. Goods will not sell. Embarrassments set in, 
followed by forced sales at any price. Inflation and over-confidence 
give place to insecurity and panic. Then comes the crash result- 
ing in ruin to thousands of capitaHsts and in widespread depression 
and stagnation. Hundreds of thousands of workmen are thrown 



ECONOMIC INSECURITY 519 

out of employment. All the classes that depend on the operations 
of capital, that is to say the entire society, suffer more or less from 
the prevailing depression. And we have the fearful spectacle of 
starving multitudes in the midst of overflowing markets and store- 
houses ; superabundant food and clothing and all the other means 
of subsistence, comfort and culture, but inaccessible even to those 
who are most anxious to work ; vast numbers of men ruined through 
the very effectiveness and perfection of the productive forces which 
they have themselves created. The workers starve because they 
have produced too much and too well ; through the action of mechan- 
ical forces which have been created, but are not duly controlled by 
man. 

So long as these productive forces are wielded in such a chaotic 
way by private capitalists competing for a world market, without 
adequate knowledge of its needs, without arrangement with each 
other, without system and prevision, so long must such disorder last. 
The capitalist, too, suffers fearfully, but it is the workman that must 
usually bear the heaviest burden of privation and wretchedness. 

255. Machinery and the Demand for Labor- 

BY JOHN A. HOBSON 

The motive which induces capitalist employers to introduce into 
an industry machinery which shall either save labor, by doing the 
work which labor did before, or assist labor by making it more 
efficient, is a desire to reduce the expense of production. A new 
machine either displaces an old machine, or it undertakes a process 
of industry formerly done by hand labor without inachinery. 

When a new process is first talcen over by inachinery the ex- 
penses of making and working the machines, as compared with the 
expenses of turning out a given product by hand labor, will involve 
a net diminution of employment. Proof of this is the introduction 
of the new machinery ; otherwise nO' economy would be effected. 
Neither in economic theory nor in industrial practice is there any 
justification for the belief that the net result of improved machinery 
is a maintenance or an increase of employment within the particular 
trade, or even within the group of the interdependent trades en- 
gaged in producing or supplying a class of commodities. vStill less 
support is there for this belief as applied to the trade of a par- 
ticular locality or national area. While the introduction of new 

^Adapted from The Evolution of Modern Capitalism, new and revised 
edition, 317-334. Published by Charles Scribner's Sons (1906). 



520 CURRENT ECONOMIC PROBLEMS 

labor-saving machinery in type-setting and printing has been fol- 
lowed by so large an expansion of business as to employ increased 
numbers of workers, recent improvements in most British textile 
mills, cotton, woolen, hemp mills, have been followed by an absolute 
reduction of employment. Statistics point to the conclusion that 
the further a nation advances in the application of labor-saving ma- 
chinery to the production of goods which satisfy the primary needs 
of the population, the smaller the proportion of the total employed 
class engaged in these productive processes. The best available sta- 
tistics indicate that the proportion of employment afforded by the 
staple manufacturers as a whole dimiinishes after modern machine 
methods are well established, and that the tendency is strongest in 
those manufacturers engaged in supplying ordinary classes of tex- 
tile, metal, and other goods in the home markets. 

• In order to judge the net effect of labor-saving machinery upon 
the volume of employment, a wider view is necessary. If the first 
effect is to cheapen goods, we need not look to the expansion of 
demand for this class of goods to absorb the labor which it is the 
object of the machine to displace. We must look to the expansion 
of demand for other sorts of goods due to the application of the 
elements of income saved by the fall of prices in the first class of 
goods. For instance, if cotton goods are cheaper owing to im- 
proved methods of production, the chief result may be tO' increase 
the demand for furniture. 

This wider outlook enables us to conclude that though the 
effect of niiachinery may be a reduction of employment in a special 
trade or group of trades, the general result must be to maintain 
the same aggregate volume of employment as before, provided the 
income liberated from a particular demand is applied to other de- 
mands for commodities. If, as may be objected, there is a simul- 
taneous tendency to reduce the prices of most articles of ordinary 
consumption, by applying machine methods of production, the 
normal result would be to stimulate new wants, and so to create 
new channels of production yielding employment to displaced labor. 
That this is the fact in the world of industry no one can seriously 
doubt. 

If the improvements of machine-methods were regular, gradual, 
and continuous in the several industries, no considerable effect in 
reducing the volume of employment would occur. But where in- 
dustrial improvements are sudden, irregular, and incalculable, na- 
tural adjustment is not possible. It is this irregular action which 
has proved so injurious to large bodies of laborers whose employ- 
mient is subjected to a sudden and large shrinkage. From time to 



ECONOMIC INSECURITY 521 

time great numbers of skilled workers find the value oi their per- 
sonal skill cancelled, and are driven either to acquire a new skill 
or to compete in the unskilled market. Yet history certainly shows 
that the fuller application of great inventions has been slow, allow- 
ing ample time for adjustment. In most cases where distress has 
been caused, the directly operative influence has not been intro- 
duction of machinery, but sudden change of fashion. The sud- 
denly executed freaks of protective tariffs have also been a source 
of disturbance. So far as the displacement has been due tO' ma- 
chinery sufficient warning has been given to check the further flow 
of labor into such industries and to divert it into other businesses. 
Moreover the changes which are taking place in certain machine 
industries favor the increasing adaptability O'f labor. Many machine 
processes are either common to many industries, or are so narrowly 
distinguished that a fairly intelligent workman accustomed tO' one 
can soon learn another. 

Whether machinery, apart from the changes due to its intro- 
duction, favors reg"ularity or irregularity of employment, is a ques- 
tion to which a tolerably definite answer can be given. When the 
employer has charge of enormous quantities of fixed capital, his 
individual interest is strongly in favor of full and regular employ- 
ment of labor. On the other hand great fluctuations in price occur 
in those commodities which require for their production a large 
proportion of fixed capital. These fluctuations in prices are ac- 
companied by corresponding fluctuations in wages and irregularity 
of employment. Why this contradiction? It is that in the several 
units of machine-production we have admirable order and adjust- 
ment of parts. In the aggregate of machine production we have 
less organization and more speculation. Industry has not yet adapted 
itself to the changes in the environment produced by machiner}^ 
That is all. Modern machinery has enormously expanded the size 
of markets, the scale of competition, the complexity of demand, and 
production is no longer for a small, local, present demand, but for 
a large, world, future demand. Hence machinery is the direct 
cause of the fluctuations which bring irregularity of employment. 

But there is another force which makes for an increase of specu- 
lative production. It has been seen that the proportion of the 
workers engaged in producing comforts and luxuries is growing, 
while the proportion of those producing the prime necessities of life 
is declining. Hence the effect of machinery is to drive ever and 
ever larger numbers of workers fromi the less to the more unsteady 
employments. Moreover, there is a marked tendency for the de- 
mand for luxuries to become more irregular and less amenable to 



522 CURRENT ECONOMIC PROBLEMS 

calculation, and a corresponding irregularity is imposed upon the 
trades producing them. This is true of many season and fasHion 
trades. The irregularity of these trades prevents them from reap- 
ing the full advantages of the economies of machinery. A larger 
proportion of town workers is constantly passing into trades in 
which changes in taste and fashion are largely operative. 

Thus there are three modes in which modern capitalist methods 
of production cause temporary employment : 

1. Continual increments of labor-saving machinery displace 
laborers, compelling them to remain unemployed until they have 
adapted themselves to the new situation. 

2. Miscalculation, to^ which machine-industries with a wide 
unstable market are particularly prone, bring about periodic depres- 
sions of trade, throwing out of employment large bodies of work- 
ers. 

3. Economies of machine production drive an increasing pro- 
portion of laborers into trades supplying commodities, the demand 
for which is more irregular, and in which the fluctuation in the 
demand for labor must be greater. 

256. Economic Insecurity and Insurance^ 

BY WII.I.IAM If. WIIvIvOUGHBY 

In a broad sense all forms of insurance may be described as 
social insurance, since social ends are attained by them. As the 
term is now employed, however, it is usually restricted to those 
forms of insurance having to do with contingencies affecting indi- 
viduals as opposed to those affecting property. It looks to the con- 
ferring of pecuniary benefits in all those cases where for any reason 
the capacity of the individual to provide for the support of himself 
and those dependent upon him is lessened or destroyed. Stated in 
another way, social insurance sets to itself the task of meeting the 
problem of the economic insecurity of labor. 

Now what are the contingencies causing this economic insecurity 
against which provision must be made in some way? On examina- 
tion we find that a man's ability to support himself, and to make due 
provision for those dependent upon him, is lessened or cut off: 
( I ) by his meeting with an accident incapacitating him, temporarily 
or permanently, partially or completely, from labor; (2) by his 
falling sick; (3) by his becoming permanently disabled for labor 

^Adapted from "The Problem of Social Insurance : An Analysis," in the 
American Labor Legislation Review, III, 159-160 (1913)- 



ECONOMIC INSECURITY 523 

as the result of old age or failing powers; (4) by his death, leaving 
a widow, children, or others without adequate means for their 
support; and (5) by his inability to secure remunerative work. 

To meet each of these contingencies resort has been had to the 
principles of insurance. Social insurance is thus a term that has 
been coined to serve as a collective designation of: (i) Insurance 
against accidents; (2) insurance against sickness; (3) insurance 
against old age and invalidity ; (4) insurance against death, or, as it 
is more usually called, life insurance; and (5) insurance against un- 
employment. 

Could a just and workable plan of insurance covering these 
several points be worked out, the problem of the economic security 
of labor, one of the greatest with which society now has to deal, 
would be solved. Is there any social problem more fundamental or 
more deserving of unremitting effort ? 

Our first analysis thus resolves the problem of social insurance 
into these five branches. This division is made not merely in order 
to bring out the content or orbit of social insurance. It is funda- 
mental, since each of 'these branches of insurance has its own special 
features and problems. Insurance, notwithstanding the simplicity 
of the ideas underlying it as a device, is an exceedingly technical 
science. Particularly is this true where the human factor has to be 
dealt with. Still more is it complicated where a departure is con- 
templated from the system of purely voluntary, unencouraged, 
unaided use of the device on the part of individuals, and resort is 
proposed to the force of social encouragement, control and con- 
pulsion. Each of these five branches of social insurance thus has its 
own special problems and considerations ; they are united only in 
respect to their ultimate social end. 

These special problems can, in each case, be distinguished, for 
purposes of consideration, into three distinct classes: (a) the social, 
(b) the administrative, and (c) the technical. Of these the first is 
the most fundamental. Under this head falls the great question of 
upon whom shall fall the burden of making the contributions re- 
quired for the support of the system. No real progress can be made 
until we, the public, have reached a conclusion regarding the problem 
of justice that is here involved. As a matter purely of right, of 
justice, of bringing about the widest possible distribution of welfare, 
how shall the financial burden entailed by the system be distributed ? 
In seeking to reach an answer to this question we find that the choice 
lies between placing the burden in whole or in part upon either: 
(i) the beneficiary, or workman, (2) the employer, (3) the industry 
in which the workman is employed, or (4) the state. 



524 CURRENT ECONOMIC PROBLEMS / 

B. UNEMPLOYMENT ' 

257, Character and Types of Unemployment* 

BY W. H. BEVERIDGE 

To grasp the problem of unemployment and free ourselves from 
popular but erroneous notions on the subject, we must first get a 
clear impression of the nature of the industrial system. 

The popular conception is of industry as rigidly limited — a sphere 
of cast iron in which men struggle for living room; in which the 
greater the room taken by any one man the less must there be for 
others ; in which the greater the number of men the worse must 
be the case for all. The true conception is a sphere made of elastic 
material, capable of expansion and being in fact continually forced 
to expand by the struggling of those within. Each individual ap- 
pears to be and, no doubt, to some extent is, pressing upon the room 
of his neighbors ; the whole mass presses upward upon the limits 
within which it is for the moment confined ; the result of a particu- 
larly violent struggle of one man for the room of others may be 
to enlarge appreciably the 'room for all. 

This expansion of industry cannot readily be made visible, and is 
nowhere recorded in direct and comprehensive figures. It is and 
must always remain something of a mystery. It does not take place 
evenly. It is perhaps not a thing to be counted on forever. The 
sphere may at last lose its elasticity and cease to respond further to 
the increasing pressure from, within. That, if it ever happens, will 
mean over-population, a diminishing return to labor, a falling stand- 
ard of life, and, unless the growth of numbers be arrested, a grad- 
ual but certain return to barbarism for the immense majority of 
people. For the present it is sufficient to say that the time has not 
come; it is not within sight; it can barely be imagined. For the 
present the sphere of industry retains its elasticity. It expands, not 
indeed steadily, but still sufficiently for the people. It absorbs the 
generations as they come. It yields each fresh man on the whole 
more living and working room than fell to the lot of those who went 
before. 

Yet -with all this comes the perpetual cry of some who find no 
living and working room at all. The number of the unemployed 
never falls to zero. Many who recognize the indisputable facts of 
the expansion of industry and the rising standard of life are prone 
to deny directly or implicitly the existence of an unemployment 

^Adapted from Unemployment: A Problem of Industry, 11-14. Published 
by Longmans, Green & Co. (1908). 



ECONOMIC INSECURITY 525 

problem at all. If there are not too many workmen in a country, 
every man who wants work must be able to obtain it. If any man 
fails to find room while all around him fresh room is opening up, 
he must be either unfit or unwilling to do so. He must be "unem- 
ployable," incompetent, lazy, sick, or infirmi. 

■ Yet unemployment is not to be explained away as the idleness of 
the unemployable. As little can it be treated as a collection of acci- 
dents to individual working people or individual firms. It is too 
widespread and too enduring for that. While the final absorption of 
the growing population in the growing industry is accepted as being 
for the country still happily the rule, it is no less necessary to admit 
the existence of facts modifying the completeness of this absorp- 
tion at certain times and places — indeed, at all times and places. 
There is no general want of adjustment between the increase of 
the people and the expansion of industry, between the rate of sup- 
ply of fresh labor and the normal growth of the demand for it. 
There are specific imperfections of adjustment which are the causes 
of unemployment. 

One of these has long been recognized. While industry, as a 
whole, grows, specific trades may decay, or change in methods and 
organization. The men who have learned to live by those trades 
may find their peculiar and hard-won skill a drug on the market and 
themselves permanently displaced from their chosen occupations, 
while lacking both the youth and the knowledge to make their way in 
new occupations. 

A second type of maladjustment between the demand for and 
the supply of labor is found in actual fluctuations in industrial activ- 
ity. Many trades, perhaps most trades, pass regularly each year 
through an alternation of busy and slack seasons, determined by 
climate or social habits, or a combination of both. Building is slack 
in winter and busy in spring and summer. Printers find least to do 
in the August holidays and most in the season just before Christmas. 

Behind and apart from these seasonal vicissitudes of special 
trades, and affecting, though in various degrees, nearly all trades at 
about the same time, is a cyclical fluctuation in which periods of 
general depression alternate at regular intervals with periods of fev- 
erish activity. At such times of depression the industrial system 
does appear to suffer a temporary loss of elasticity; it fails for a 
while to keep pace with the steady growth of population ; it gives — 
in a phase of falling wages and lowered standards— an object lesson 
of what might be expected if the supply of labor should ever come 
permanently to outstrip the demand. 



526 CURRENT ECONOMIC PROBLEM'S 

These two elements in the problem of unemployment have long 
been familiar. A third, apparently far more important than either 
of the occasional transformations of industrial structure or the pe- 
riodic fluctuations of industrial activity, is only just beginning to 
receive attention. This is the requirement in each trade of reserves 
of labor to meet the fluctuations of work incidental even to years of 
prosperity. The men forming these reserves are constantly passing 
in and out of employment. They tend, moreover, to be always more 
numerous than can find employment together at any one time. This 
tendency springs directly from one of the fundamental facts of 
industry — the dissipation of the demand for labor in each trade be- 
tween many separate employers and centers of employment. Its 
result may be described as the normal glutting of the labor market. 
The counterpart of such glutting is the idleness at every moment of 
some or others of those engaged. 

The three factors just mentioned — changes of industrial struc- 
ture, fluctuations of industrial activity, and the reserve of labor rep- 
resent, not indeed all, but at least the principal economic factors in 
unemployment. 

258. Wanted: A Labor Exchange^ 

BY GREGORY MASON 

Mankind has been job hunting since the fall from grace in Eden. 
Even in normal times, say statisticians, from 3 to 10 per cent of the 
laboring population is out of work. In periods of depression the 
percentage is much larger. None but the wildest theorists think all 
unemployment will be done away with this side of the millennium, 
but more and more people are coming to feel that the number of 
jobless men and women in the United States can be greatly reduced 
by the injection of a little system into the situation. This feeling 
is justified by the fact that no matter how hard times may be there 
is always a number of jobs waiting to be filled. 

At present in this country men and women find jobs through four 
mediums : newspapers, private employment agencies, charitable or- 
ganizations, and undirected search. None of these mediums is sat- 
isfactory because none of them is broad enough to be in touch with 
the whole demand and the whole supply. A commission reported 
not long ago that "a. surprising amount of unemployment within our 

^Adapted from "The Jobless Man and the State," in Harper's Weekly, 
March 28, 1914. Copyright. 



ECONOMIC INSECURITY 527 

own state, over the country as a whole, and even in one city, is due 
to mere failure of the demand for labor and the supply to con- 
nect up." 

In other words, a good deal of unemployment in the United 
States is due to the absence in most states of a centralized labor 
market. Labor is as much a commodity as cotton, steel, or oil, and 
these commodities all have their central markets. When a man 
wants to buy cotton he goes to a cotton exchange. No one ever saw 
advertised "cotton wanted" or "oil wanted," yet the "help wanted" 
sign is in a thousand windows in the country, a symbol of ineffi- 
ciency and waste. 

Sixty years ago the Germans, whose social instinct is deeper than 
ours, decided that the bringing together of work and workers was a 
proper function of the state. Then was begun a great system of 
public labor exchanges which now fills annually more than a mil- 
lion jobs and makes the lot of the jobless man easier in Germany 
than in any other country. 

Ohio in 1890 was the first American state to follow the lead of 
the Germans. Employment offices were opened in five large cities 
in the state. The experiment was a success, and other states began 
to try it, timidly at first, but more boldly and in increasing numbers 
during the last decade, until there are now nineteen states with 
sixty-one public employment bureaus in the United States. 

These state labor bureaus charge no fee for their services, allot 
jobs impartially — usually distributing them in the order in which 
applications are made — and undertake not to give work to anyone, 
but merely to introduce laborers looking for work to employers look- 
ing for labor. They have won the approval of trade unions by 
maintaining a neutral attitude in strikes. Their most important 
function consists in regulating the distribution of labor over an en- 
tire state. Where the outlook of a private employment bureau is 
local, a state bureau has a bird's-eye view of the entire state and be- 
yond. For instance, in Wisconsin, where the system is more highly 
developed than elsewhere, a working man can tell by a glance at the 
monthly labor bulletin whether the demand for lumberjacks exceeds 
that for farm hands and in what part of the state the lumberjack 
demand is the strongest. As soon as a man is out of work he goes 
to one of the state employment agencies and learns in what locality 
he is most likely to find a purchaser for his labor. 

In America we need a system of free public labor exchanges in 
every state as well conducted as those in Wisconsin, and co-ordin- 
ated by a central bureau at Washington. The latter is needed be- 
cause unemployment is essentially a national question, and the 



528 CURRENT ECONOMIC PROBLEMS 

power of the state in directing the stream of labor stops at the state 
boundaries. Such a central labor office, keeping an all-embracing 
eye on the labor market in America and moving the supply of labor 
from one state to meet the demand in another has been advocated 
by the labor commissioners of a number of states which already sup- 
ply free labor brokerage to their inhabitants. 

It would be the task of such a central bureau to keep labor evenly 
distributed, removing the usual surplus from large cities to the 
labor-hungry districts of the country. Such a central bureau could 
also minimize the evil effects of seasonal employment, for example, 
by shifting the labor that is left idle in agricultural states after the 
harvest to localities where there is ice or timber to be cut or other 
winter work to be done. 

Surely it is not revolutionary to propose that a government that 
dispenses to its citizens information on subjects ranging from crops 
to first-aid-to-the-injured should take a hand in bringing together the 
man and job. 

259- Cyclical Distribution of Government Orders® 

BY SIDNEY AND BEATRICE WEBB 

Without securing an approximate uniformity, one year with an- 
other, in the aggregate demand for labor in the community as a 
whole, it is clear that unemployment on a large scale cannot be pre- 
vented. The only possible way in which that uniformity can be se- 
cured is the use of the government orders as a counterpoise to the 
uncontrollable fluctuations in the other orders. If this involved the 
stopping of all government orders in good years and doing all the 
government work in bad years, the proposal would be an imprac- 
ticable one, because the government business must go on contin- 
uously, whatever the state of the labor market. But if the desired 
result can be achieved by rearranging, within the decade, no more 
than 3 or 4, or even 6 or 8 per cent of the work that would otherwise 
have been done evenly year by year. It is impossible to believe that 
so relatively small a readjustment is not possible. 

It may be asked how this policy differs from that of relief works 
now so universally condemned. In reality the two policies are poles 
asunder. What gives to relief works their evil character, whether 
or not they are of any real public utility, and whatever rate of wages 

''Adapted from The Prevention of Destitution, 114-118. Published by 
Longmans, Green & Co. (1911). 



ECONOMIC INSECURITY 529 

is paid, is that the men employed are taken on because they are un- 
employed. Accordingly, relief works are of the nature of relief, 
not prevention. They do not prevent the occurrence of unemploy- 
ment; they do not prevent that breach of continuity in the work- 
man's industrial life which is so harmful to him. They merely 
come in, by way of succour, after the breach of continuity has oc- 
curred. And by having to take on only those men who have already 
been thrown out of work, and taking them on because they have been 
thrown out of work, the managers of relief works find themselves 
necessarily saddled with a heterogeneous crowd of workmen, who 
are not individually picked out for employment because their specific 
services are required, in exactly due proportions to each other ; but 
are taken en bloc, whatever their several qualifications and ante- 
cedents, just because they happen, at that particular time and place, 
to be together unemployed. Now it is characteristic of any enter- 
prise of remunerative character that it involves a high degree of 
organization, division of labor, the employment of the various 
grades and kinds of workers required in a certain exact proportion 
one to another, and so on. The result is not being able, on rehef 
work, to pick exactly the men having the skill and antecedents that 
are required, and of having, instead, to take on a heterogeneous 
crowd, is that no industrial enterprise of any highly organized char- 
acter can possibly be undertaken, and the work accordingly can 
hardly ever be remunerative, or form part of normal productive 
industry. 

But it is not so much in the extravagant cost, or in the waste- 
fulness, or in the lack of real utility that the evil of relief work lies. 
It is in their bad effect upon the character of the men whom they 
are intended to succor. The taking on of the heterogeneous crowd, 
not to work each of them at his own trade, for his own standard rate, 
but to labor at some common occupation that can simultaneously find 
employment for them all ; which is known to have been undertaken 
merely to give them employment, from which they cannot practi- 
cally be dismissed; and where they receive wages at a rate arbi- 
trarily fixed, to a view of what they can live on rather than to the 
market rate for any particular kind of labor, inevitably has an ad- 
verse psychological reaction on the men themselves and on the fore- 
men over them. 

Now contrast this with the proposal to give to the government 
orders for works and services unevenly, and more in the lean years. 



530 CURRENT ECONOMIC PROBLEMS 

rather than evenly year by year. The mere fact that, on the index 
number of unemployment beginning to rise, the government puts in 
hand slightly more building work than would otherwise have been 
the case, orders rather more printing, somewhat increases its ship- 
building, raises this year the amount of its orders for blankets and 
sail-cloth above the normal, and temporarily accelerates the rate at 
which the telegraph wires are being laid underground, and the tele- 
phone is being extended to every village, would not mean the taking 
on of any crowd of unemployed workmen anywhere. 

What it would mean, in the first place, would be that various 
building firms and printing establishments all over the country would 
find themselves relieved from the necessity of turning ofif men ; some 
shipbuilding yards would be able to abstain from the necessity of 
reducing hands; the mills producing blankets and sail-cloth would 
not need to go on short time ; and the contractors for telegraph and 
telephone extensions would find themselves continuing in employ- 
ment, and placing on the government work members of their staffs 
whom they would otherwise have had to dismiss. All this preven- 
tion of discontinuity in the employment and wages of tens of thou- 
sands of workmen all over the country, and, for that matter, also in 
the profits of hundreds of employers, would automatically result in 
preventing much other discontinuity elsewhere. Even the gramo- 
phone makers might find themselves continuously, instead of inter- 
mittently, employed ! 

And where employers, by reason of the enlarged government or- 
ders, had actually to engage additional men they would do so, not 
with a view of "employing the unemployed," not even of confining 
themselves to the men who were at the moment actually out of sit- 
uations, but deliberately, in order to attract to their service, it might 
be from some other employer's service, exactly the kinds and grades 
of workmen, individually selected on their merits, as being the most 
skilful and the most regular workmen who could then and there be 
found, in exactly the due proportion one to another that the expan- 
sion of the particular business required. 

There would in this way be no adverse psychological effect on 
the workmen, any more than on the foreman who selected them and 
supervised their efforts or in the employer who saw to it that the 
normal discipline of his establishment was maintained. Instead it 
would not even occur to any of them that there was anything "arti- 
ficial" or abnormal in the government order for sail-cloth or other 
commodities. 



ECONOMIC INSECURITY 531 

260. Insurance against Unemployment^ 

BY W. H. BEVERIDGE; 

There is needed some definite provision against the incalculable 
varieties of individual misfortune which attend the cyclical fluctua- 
tions in most trades. This is to be sought in some form of insurance 
against unemployment. 

The term "insurance" in this connection cannot be used as a 
term of art. It must be taken to apply loosely to any process where- 
by each of a number of workmen sets aside something of his wages 
while earning to obtain an allowance in case of unemployment. It 
need not be taken as excluding the possibility of grants to the insur- 
ance fund from other sources. Its essence is for the individual 
workman an average of earnings between good and bad times, and 
for the body of workmen a sharing of the risk to which they are all 
alike exposed. 

In this looser sense insurance is already one of the most impor- 
tant methods of dealing with unemployment. It is found in the 
form of benefits paid by many trade unions to their unemployed 
members. These benefits are of two principal types — the stationary 
or unemployed benefit, strictly so called, and the allowance given to 
assist traveling in search of work. 

In practice the benefits vary greatly from union to union, both in 
amount and in duration. Their range is from 6 shillings a week for 
four weeks in fifty-two to 14 shillings a week for twenty, and even 
for thirty weeks, in the calendar year. The conditions under which 
benefits are granted present the widest variety. 

The system of trade union benefits probably does more than any 
existing agency to provide against distress through want of employ- 
ment. It does it without injury to self-respect and at a cost which 
in comparison with the effect produced is extremely small. It has 
the outstanding merit of flexibility. By substituting collective for 
individual savings it shifts on to each trade, as a whole, part of the 
burden of the necessary margin of idleness. 

The effectiveness of the system is to be judged by the fact that 
members of the unions paying any substantial unemployed benefit 
are hardly ever applicants for public charity. The allowance given 
is not, in itself, adequate. It has to get supplemented, and does get 
supplemented, by the earnings of wife and children, by assistance 

''Adapted from Unemployment : A Problem of Industry, 223-227. Pub- 
lished by Longmans, Green & Co. (1908). 



532 CURRENT ECONOMIC PROBLEMS 

from fellow workmen and neighbors, by running into debt, by pawn- 
ing, and in other ways. It serves, however, as a nucleus. It keeps 
the rent paid. In practice it prolongs almost indefinitely the resisting 
power of the unemployed. 

The method of insurance is flexible, as no provision for relief 
by employment can be flexible. No temporary or accidental stoppage 
is too small for it. The machinery of assistance is always ready; so 
soon as a man becomes unemployed, from whatever cause, he has 
only to begin signing the vacant book in order to become entitled to 
an allowance. On the other hand, the severest depression of trade 
is hardly too great to be dealt with in this way. The relief once be- 
gun can be and practically is continued for the great bulk of men so 
long as proves necessary. 

The method of insurance throws upon each trade as a whole the 
burden or part of the burden of its margin of idleness. Unionism 
substitutes the collective for the individual consciousness, and thus 
enables the risk of unemployment in all its forms to be appreciated 
as a normal incident of industry. The individual finds the risk very 
hard to appreciate and still harder to provide against. He may ex- 
pect and allow for occasional loss of earnings through bad weather 
or ill luck or in passing from one job to the next. He may expect 
and allow for seasonal fluctuation. Cyclical fluctuation stands prac- 
tically on a different footing. It comes at far greater and less reg- 
ular intervals ; it lasts, not for weeks, but for months or years. 
Moreover, it tends to strike always the older or weaker members of 
a trade. In the strength of his youth a man may pass unscathed 
through two or three depressions, to be thrown out by the next when 
he is forty years old or more. 

In the life of the individual excessive depression appears often as 
a unique disaster. In the life of a great organization, exceptional 
depression is but the downward phase of cyclical fluctuation — a 
phenomenon impressive and familiar, writ large in the records of 
recurrent increase of the unemployed percentage, recurrent pressure 
on the funds, recurrent decline or stagnation of membership. For 
such an organization the proviso of unemployed benefits becomes 
provision against an absolutely certain danger. Appreciation of this 
certainty reacts on wages. To keep its members together, the union 
helps them when unemployed ; it must therefore hold out for wages 
sufficient to cover the heavier subscriptions involved. In the shape 
of these higher wages it transfers to the tradfe as a whole the burden 
or part of the burden of unemployment. 



ECONOMIC INSECURITY 533 

Unfortunately the application of the vSystem is at present very 
limited. Even a very large number of trade unions have no effec- 
tive provisions against unemployment. Outside the trade unions 
insurance is unknown. 

261. An Appraisal of Unemployment Insurance^ 

BY WIIvLIAM F. WILIvOUGHBY 

The experiments that have been made in Switzerland and else- 
where, while they are not sufficiently extensive to furnish con- 
clusive evidence regarding the practicability of insurance against 
unemployment, are fully adequate to bring out the chief consider- 
ations that must be taken into account in any attempt to organize 
such a system. 

An examination of the nature of the problem oi unemployment 
shows that insurance principles are ill suited for its solution. In- 
surance presupposes that the risk involved shall possess two char- 
acteristics, — it must be well defined, and it must be the consequence 
oi a chance that can be estimated with some degree of certainty. 
The risk of unemployment conforms to neither of these conditions. 
It is not well defined, since there is no fixed criterion as to what 
work the unemployed should be required tO' accept. It does not 
depend upon calculable chance, because the personal element in- 
volved in seeking and retaining work, tO' say nothing of the un- 
certainty of the employer's action, enters so largely. Though lack 
of employment is often unavoidable on the part of the workingman, 
the latter' s will and energy play such an important part in the mat- 
ter that any attempt to distinguish unavoidable idleness is futile. 
Insurance concerns itself with a risk that can be calculated and 
provided for in advance ; but this cannot be done in regard to lack 
of employment. 

In no case where tried, has the attempt been made to calculate 
risks and to adjust contributions accordingly, or indeed to make 
the system self-supporting. Only nominal contributions have been 
required frorn members, while the great burden of expense has 
been borne by the government and by voluntary contributors. In 
reality, therefore, it is scarcely proper to speak of these institutions 
as insurance organizations. What has been created is really a more 
methodical system of granting relief tO' the unemployed. 

The problem of lack of employment in the factory trades is 
'quite different from that in the building trades or among ordinary 

^Adapted from Working-men's Insurance, 375-378- Copyright by T. Y. 
Crowell & Co. (if 



534 CURRENT ECONOMIC PROBLEMS 

day laborers. It may be confidently stated that any attempt to 
introduce even a modified form of insurance against unemployment 
should follow strictly trade lines. 

This, however, brings us to the consideration of the out-of-work 
benefit features of labor organizations. If unemployment insurance 
should follow trade lines, every argument would seem to indicate 
that such efforts should be made through existing organizations of 
workingmen. The great work done by these organizations in the 
way of aiding their members is well known. In the United States 
a large part of the expenditures of the trade unions likewise go for 
this purpose, though it is not possible to make any exact statement 
of the amount. This method of granting relief possesses manifest 
advantages. The work of unions is not charity but the highest 
order of mutual aid. Labor unions, moreover, are in a peculiarly 
favorable position to assist their memibers in obtaining work, and 
are able to guard themselves against imposition. Finally, as we 
have seen, unemployment is not a condition beyond the control of in- 
dividuals, and does not happen with a regularity that can be cal- 
culated. Insurance proper affords little room for discretion in 
granting relief, while each case of unemployment should be con- 
sidered upon its particular merits. Labor organizations can exer- 
cise this necessary discretion in a way that is utterly beyond the 
power of a municipal institution. 

The logical conclusion is that in America, at least, provision 
against lack of employment can best be made for the established 
trades by the men themselves through their organizations ; and that 
this provision cannot be made according to hard and fast insurance 
principles, but must allow for a certain elasticity or discretion in the 
granting of relief, according to the circumstances of each case and 
the amount of funds available for this purpose. 



C. INDUSTRIAL ACCIDENT 
262. The Machine Process and Industrial Accident^ 

BY D. H. downe;y 

Work accidents in the United States, according to the best at- 
tainable estimates, annually cause more than 35,000 deaths and about 
2,000,000 injuries, whereof probably 500,000 produce disability last- 
ing more than one week. To employ a telling comparison frequently 
made, the industrial casualties of a single year in this country alone 

"Adapted from History of Work Accident Indemnity in Iowa, 1-5. Pub- 
lished by the State Historical Society of Iowa (1912). 



ECONOMIC INSECURITY 535 

equal the average annual casualties of the American Civil War, 
plus all those of the Philippine War, increased by all those of the 
Russo-Japanese War. As many men are killed each fortnight in the 
ordinary course of work as went down with the "Titanic." This 
single spectacular catastrophe appalled the civilized world and com- 
pelled governmental action in two hemispheres ; while the ceaseless, 
day-by-day destruction of the industrial juggernaut excites so little 
attention that few states take the trouble to record the deaths and 
injuries. 

The point especially to be emphasized in this connection is that 
the appalling waste of life revealed by the above cited estimates is, 
in great part, unavoidable. Doubtless the number of work acci- 
dents may be considerably reduced in the United States, as it has 
been reduced in Europe, by preventive measures. Yet when all pos- 
sible precautions have been taken modern industry will continue to 
exact a fearful toll of life and limb. Even in the German Empire, 
which leads- the world in accident prevention, there were reported in 
191 1, the last year for which statistics are available, 662,321 work 
accidents, whereof 9,687 terminated fatally and 142,965 caused dis- 
ability for more than thirteen weeks. Scientific accident prevention 
in Germany has produced a lower accident rate and a much lower 
rate of fatal accidents than obtains in the United States, but it has 
left the total casualty list of industry deplorably large. Indeed, the 
number of work injuries in Germany, as elsewhere, is increasing, 
both absolutely and relatively to the numbers employed, as indus- 
trial development goes forward. The ugly fact is that work acci- 
dents, in the main, are due to causes inherent in mechanical industry 
on the one hand, and in the hereditary traits of human character on 
the other hand. 

In the first place, a high degree of hazard inheres in present-day 
methods of production. Modern technology makes use of the most 
subtle and resistless forces of nature — forces whose powers of de- 
struction when they escape control are fully commensurate with 
their beneficent potency when kept in command. Moreover, these 
forces operate not the simple hand tools of other days, but a maze of 
complicated machinery which the individual workman can neither 
comprehend nor control, but to the movements of which his own 
motions must closely conform in rate, range, and direction. Nor is 
the worker's danger confined to the task in which he is himself 
engaged, nor to the appliances within his vision. A multitude of 
separate operations are combined into one comprehensive mechanical 



536 CURRENT ECONOMIC PROBLEMS 

process, the successful consummation of which requires the co-oper- 
ation of thousands of operatives and of countless pieces of appar- 
atus in such close interdependence that a hidden defect of even a 
minor part, or a momentary lapse of memory or of attention by a 
single individual may imperil the lives of hundreds. A tower man 
misinterprets an order, or a brittle rail gives way, and a train loaded 
with human freight dashes to destruction. A miner tamps his "shot" 
with slack and dust explosion wipes out a score of lives. A steel 
beam yields to a pressure that it was calculated to bear and a rising 
skyscraper collapses in consequence, burying a small army of work- 
men in the ruins. 

In the second place, human nature, inherited from generations 
that knew not the machine, is imperfectly fitted for the strain put 
upon it by mechanical industry. Safely to perform their work the 
operatives of a modern mill, mine, or railway should think consis- 
tently in terms of those mechanical laws to which alone present-day 
industrial processes are amenable. They should respond automat- 
ically to the most varied mechanical exigencies, and should be as 
insensible to fatigue and as unvarying in behavior as the machines 
they operate. 

Manifestly these are qualities which normal human beings do not 
possess in anything like the requisite degree. The common man is 
neither an automaton nor an animated slide-rule. His movements 
fall into a natural rhythm, indeed, but the beat is both less rapid and 
more irregular than the rhythm of most machines — with the conse- 
quence that he fails to remove his hand before the die descends or 
allows himself to be struck by the recoiling lever. It requires an ap- 
preciable time for the red light or the warning gong to penetrate his 
consciousness, and his response is apt to be tardy or in the wrong 
direction. Fatigue, also, overcomes him, slowing his movements, 
lengthening his reaction time, and diminishing his muscular accuracy 
— thereby trebly enhancing his liability to accident. 

The machine technology, in fact, covers so small a fraction of 
the life history of mankind that its discipline has not yet produced a 
mechanically standardized race, even in those communities and 
classes that are industrially most advanced. And so there is a great 
number of work injuries due to the "negligence of the injured work- 
man" — due, that is to say, to the shortcomings of human nature as 
measured by the standards of the mechanician. This maladjust- 
ment is aggravated by the never-ceasing extension of machine meth- 
ods to new fields of industry, and the continued influx of children, 
women, and untrained peasants into mechanical employments. Ac- 



ECONOMIC INSECURITY 537 

cordingly, the proportion of accidents attributable to want of knowl- 
edge, skill, strength, or care on the part of operatives appears 
everywhere to be increasing. 

There is, then, no prospect that the "carnage of peace" will be 
terminated, as the carnage of war may be, within the predictable 
future. An industrial community must face the patent fact that 
work injuries on a tremendous scale are a permanent feature of 
modern life. Every mechanical employment has a predictable haz- 
ard ; of a thousand men who climb to dizzy heights in erecting steel 
structures a certain number will fall to death, and of a thousand 
girls who feed metal strips into stamping machines a certain number 
will have their fingers crushed. So regularly do such injuries occur 
that every machine-mjade commodity may be said to have a definite 
cost in human blood and tears — a life for so many tons of coal, a 
lacerated hand for so many laundered shirts. 

263. Imputation of Responsibility for Accidents^" 

a) Safety First 

Employees, before they attempt to make couplings or to uncouple, 
will examine and see that the cars or engines to be coupled or un- 
coupled, couplers, drawheads, and other appliances connected there- 
with, ties, rails, tracks, and roadbeds, are in good safe condition. 
They must exercise great care in coupling and uncoupling cars. In 
all cases sufficient time must be taken to avoid accident or personal 
injury. 

h) Efficiency First 

Entirely too much time is being lost, especially on local trains, 
due to train and enginemen not taking advantage of conditions in 
order to gain time doing work, switching and unloading and loading 
freight. Neither must you wait until train stops to get men in 
position. It is also of the utmost importance that enginemen be 
alive, prompt to take signals, and make quick moves. In this 
respect it is only necessary to call your attention to the old adage, 
which is a true one, that when train or enginemen do not make good 
on local trains it thoroughly demonstrates those men are detrimental 

^"The first of the two selections given here is an excerpt from an official 
bulletin of a railway company; the second is an excerpt from a letter of in- 
struction to eijiployees issued by the same company. The first suggests that 
there may be truth in the frequently repeated statement that "the most effec- 
tive way for railroad employees to practice sabotage is to live up to the rules 
of the company." 



538 CURRENT ECONOMIC PROBLEMS 

to the service as well as their own personal interests, and such men, 
instead of being assigned to other runs, should be dispensed with. 
1 am calling your attention to these matters with a view of invigorat- 
ing energy and ambition, in order that your families who are depend- 
ent on you to make a success shall not some day point the finger of 
scorn at you, and that the public may not be able to say you lost your 
position due to lack of energy and interest in your own personal 
welfare, for which you can consistently place the responsibility on 
no one but yourself. 

264. Industrial Accidents and the Theory of Negligence^^ 

BY IvEe; K. IfRANKE;iv AND MII.ES M. DAWSON 

Let US consider the principles which, only a quarter century ago, 
determined the right of a workman to recover compensation from 
his- employer. Those principles still apply, with some modification, 
in all the states of the United States, and have but recently been 
discarded in part by the federal government itself. The elementary 
theory of "the law of negligence," as it is usually called, in its rela- 
tion to the liability of employers for financial loss to workmen and 
their famihes, was originally the same in all civilized countries. The 
development of the law of liability has not been identical in every 
country, but nowhere, probably, has the principle been pushed so far 
as in the United vStates. The doctrine has, however, been modified 
somewhat by decisions of the courts and by act of our legislatures. 

The underlying principle of 'the law of negligence is that the 
employer is liable only in case he is at fault; that is, he must have 
been neglectful in some respect and this negligence must have been 
the proximate and sole cause of the accident. In that case it declares 
that he alone must bear the financial burden of compensation. 

Liability of the employer for his own negligence is qualified as 
follows : 

First, it is not enough that he zvas the chief cause. 

If the employe himself has been negligent and if this in any 
degree contributed to the accident, the employer is not held. This is 
known as the principle of "contributory negligence." The idea is 
that the courts, not being able to separate results flowing from these 
two causes and to determine how much was due to one and how much 
to the other, v/ill refuse to grant compensation if the employe's negli- 
gence contributed to the accident even though only in a slight degree. 

^^ Adapted from W orkingmen' s Insurance in Europe, 5-7. Copyright by 
the Russell Sage Foundation (1910). 



ECONOMIC INSECURITY 539 

Second, the accident must not have been a consequence of the 
ordinary risks of the occupation. 

If it can be shown or the conclusion fairly be deducted that the 
employe assumed this particular risk as a condition of his contract 
of employment, or as the ordinary risk of his occupation of which 
he knew or was bound to know, the employer is not held. If the 
employe was aware that a certain danger existed and notwithstanding 
continued to work, this action on his part would bar recovery. As 
a corollary to this, the courts have held very generally that the em- 
ploye must be presumed to know what are the ordinary dangers of 
his occupation, and even what are the unusual dangers connected 
with continuing to perform the duties of that occupation, when the 
place where it is carried on, or the machinery or tools with which it 
is carried on, are defective. 

This is called the principle of "assumption of risk." Some courts 
have gone so far as to hold that, even though the employer is required 
by law to keep the machinery, tools, and the place in which the work 
is done in a certain condition of safety, and that although by failing 
to do so he has rendered himself liable to a penalty, the workman, 
notwithstanding, will not be able to recover if he has known of these 
defects and has nevertheless continued to work. The same courts 
have also held that the fact that he has called the defects to the 
attention of his employer and asked that they be remedied, will not 
render the employer liable if the workman, notwithstanding that the 
defects have not been remedied, continues to work. In fact, calling 
the defects to the attention of others prejudices his claim in that it 
is proof positive that he knows of them. 

Third, the accident r.iust have been the residt of the employer's 
ozvn negligence and not that of another employe or employes. 

If the workman has been injured because one or more of the 
employes working with him were negligent, the employer will not be 
held. This proceeds from the idea that each workman whose negli- 
gence has caused the injury should himself be held financially re- 
, sponsible ; and since in most cases he is in fact financially irrespon- 
sible and could not respond to a judgment, the result of the applica- 
tion of this rule is that the persons injured are not compensated at 
all. This is directly contrary to the rule which applies when the 
injury is to one not an employe ; in that case the employer, under the 
general doctrine of principal and agent, is held liable. 

The principle stated above is known in practice as the "fellow 
servant" rule. It has been carried so far by some courts that it is 
difficult to see how a corporation employer could be held responsible 
at all, no matter what officer or other employe was negligent. Even 



540 CURRENT ECONOMIC PROBLEMS 

an officer is an agent or employe, and therefore a fellow servant with 
all other employes, although the courts* have usually not ,so held. 
Except in the case of executive officers, however, the rule has been 
applied so sweepingly that, for instance, a scrubwoman washing out 
railway coaches might be held to be a fellow servant with the super- 
intendent of the road, and, therefore, without a good claim against 
the company for negligence attributable to him. 

The "fellow servant" rule grew up in the courts out of the 
simplicity of the common law, which in its origin did not know 
employers and employes in the modern industrial or commercial 
sense, but only "masters" and "servants." The law did not hold 
the master liable, even on the ground of negligence. It certainly 
would have refused to require him to compensate one servant for the 
negligence of another. This principle manifestly has little or no 
suitability for the uses of a commercial and highly organized indus- 
trial community, in which much the larger part of the service per- 
formed by employes is not for the direct enjoyment of the employer 
but is part of the aggregate cost of products or services sold by him 
to the public at a price to cover all the costs. In recent years the 
"fellow servant" rule has been much relaxed, first by the courts 
and later by legislatures. In many states an employe who super- 
vises the work and controls the workman is held to be a "vice- 
principal" and to represent the employer, so that his negligence is 
treated as if it were the negligence of the employer. 

Under the rules of law just outlined, a very large proportion of 
the accidents which occur in the industries of the country go uncom- 
pensated. In some cases, on the other hand, the employer is held 
for substantial amounts, and occasionally very large verdicts are 
recovered, but in only a small percentage of the cases is the com- 
pensation adequate. 

265. The Incidence of Work Accidents^^ 

BY E. H. DOWNEY 

Work accidents, in the nature of the case, are sustained prin- 
cipally by wage-earners, who are substantially propertyless as a mat- 
ter of course, who have no savings to speak of, and whose incomes, 
for the most part, are too small to leave any adequate margin for 
accident insurance. The almost total absence of property or savings 
among wage-workers is abundantly demonstrated by tax returns 
and the records of savings banks and life insurance companies. 

^^ Adapted from History of Work Accident Indemnity in Iowa, 6-8. Pub- 
lished by the State Historical Society of Iowa (1912). 



ECONOMIC INSECURITY 541 

But wages statistics are yet more conclusive to the same effect. A 
recent investigator of this subject, Professor Scott Nearing of the 
University of Pennsylvania, concludes that one-half of the adult 
male wage-workers of the United States receive less than $500 a 
year; that three-fourths of them get less than $600, and that only 10 
per cent are in receipt of more than $800 annually. As to women 
wage-workers, three-fifths are receiving less than $325 yearly ; nine- 
tenths are paid less than $500, and only one in twenty is paid more 
than $600. These estimates are well substantiated by the findings of 
other investigators. More than half of the workmen injured in the 
Pittsburgh district in 1907 were earning less than $15 weekly (mak- 
ing no allowance for unemployment) at the time of injury. Of the 
men sustaining industrial injuries in Minnesota in 1909-10, 47 per 
cent were receiving less than $12.50 and 78 per cent were receiving 
less than $15 weekly. 

It needs no argument to show that families in receipt of incomes 
such as these can have neither property, savings accounts nor in- 
surance. And this conclusion, finally, is corroborated by investiga- 
tions into the insurance actually carried by wage-workers. Of 132 
married men killed in Pittsburgh, only 6 had insurance in substan- 
tial amount and only 25 out of 214 left savings, insurance, and 
trade-union and fraternal benefits to the amount of $500 each. In 
New York state 175 working men who suffered fatal or permanently 
disabling accidents had insurance in the aggregate sum of $18,635. 
Nor are these extreme instances selected to make out a case. The 
average value of 13,488,124 "industrial insurance" policies in force 
in 1902 was only $135. The unvarnished fact is that the wage- 
earner neither does, nor can, provide for the contingencies of sick- 
ness, accident, and unemployment. 

To the wage-worker, then, even when no one but himself is de- 
pendent on his earnings, the loss of a few weeks' wages means se- 
rious privation, and permanent incapacity means beggary. But 
quite half the victims of work accidents are married men, and a 
majority of even the unmarried contribute to the support of others. 
For example, of 467 fatal accidents in Allegheny County, Pennsyl- 
vania, 258 were sustained by married men and 129 others by reg- 
ular contributors to the support of relatives ; whereas only 80 of the 
467 dead were wholly without dependents. Of 285 fatal accidents 
investigated in Cuyahoga County, Ohio, 176 were suffered by heads 
of famihes. Of 1,476 men killed on the job in New York state, 679 
were the sole supporters of 1,775 dependents, 167 were the principal 
supporters of 520 dependents and 252 contributed to the support of 
668 relatives — leaving but 378, or 35 per cent of the whole number 



542 CURRENT ECONOMIC PROBLEMS 

of deceased, entirely without economic responsibilities. In Wiscon- 
sin 43 per cent of the injured workmen whose conjugal conditions 
could be learned by the State Bureau of Labor were married. 

A serious work accident, therefore, commonly deprives a neces- 
sitous family of its sole, or chief, or at least a very important, source 
of income. The inevitable result, in the absence of systematic acci- 
dent indemnity, is poverty, and the long train of social evils that 
spring from poverty. It is not only that victims of unindemnified 
work accidents suffer prolonged incapacity and often needless death 
from want of means to obtain proper care, not only that families are 
compelled to reduce a standard of living already low, and that 
women and children are forced into employments unsuited to their 
age and sex, with resultant physical and moral deterioration ; but it 
is that the ever-present fear of undeserved want goes far to impair 
that spirit of hopefulness and enterprise upon which industrial effi- 
ciency so largely depends. 



266. The Necessity of Employer's Liability'^^ 

BY ADNA P', WEBER 

It must be clear, upon reflection, that the conditions under which 
modern industry is carried on preclude the possibility of explaining 
every accident by somebody's negligence. This much was dimly 
understood when various countries took the first step of shifting the 
owMvj probandi from employee to employer. If, now, the employees 
are not to blame for the innumerable injuries to which they are sub- 
ject, why should they be made to bear the financial burden of those 
injuries? Why should not that burden be distributed over the 
community instead of being concentrated upon a certain number of 
families who, in any event, will have to bear the physical and mental 
suffering involved in the death, crippling, or maiming of men? The 
risk of fire is undeniably greater in a gunpowder mill than in a 
brewery, but the owner of the mill does not bear the burden by 
contenting himself with lower profits than the brewer's ; he simply 
pays for the greater risk by higher rates of fire insurance and passes 
the cost on to the consuming public in a higher price for his product. 
If the additional expense imposed upon a gunpowder manufacturer 
through the more frequent losses by fire can be thus recouped from 
consumers, why should not the expense of indemnifying his work- 
men for accidents be likewise made a part of the cost of production, 

^^Adapted from an article published in the Political Science Quarterly, 
XVII, 279-281. Copyright (1902). 



ECONOMIC INSECURITY 543 

and thereby be transferred to the community at large? Only one 
thing will prevent such shifting of the burden, and that is the ability 
of competitors to put their goods on the market without incurring 
like charges. Hence the law must require all competitors in a given 
trade to make the same compensation for the same injuries. This is 
what Europe has done; by compelling employers to compensate 
injured employees according to a fixed scale, it has taxed the com- 
munity, through higher prices of goods, for the support of its in- 
jured members. 

Many minds bred in the philosophy of individualism will un- 
doubtedly see in such legislation nothing but injustice to the em- 
ployer. In reality such legislation is in strict conformance with the 
innermost spirit of English and American common law. It recog- 
nizes the existence of undeserved distress among workingmen and 
undertakes to alleviate their suffering by giving them a claim upon 
some person who is pecuniarily responsible. And that is precisely 
the principle embodied in the time-honored common-law rule that 
the principal is liable for the acts of his agent. 

The course of reasoning thus followed to justify the principal- 
and-agent theory of liability also justified the workmen's compensa- 
tion acts adopted by all the leading countries of Europe, which 
require the employer to assume all the risks of the employment 
which he calls into being. But while the employer makes the prim- 
ary payment, just as he pays for the wear and tear of his machinery 
or the loss of his plant by fire, the consumers ultimately pay the 
cost. The alternative to such a general distribution of the financial 
burdens of industrial accidents is the present method, by which the 
entire burden is put primarily upon the poorest classes, and when it 
crushes them, to the damage of the community, is at last tardily 
assumed by the latter through the public charities. 

D. SICKNESS AND OLD AGE 
267. The Industrial Cost of Sickness^* 

BY JOSKPH P. CHAMBERLAIN 

It is important that we should consider the many shreds of in- 
formation which may be pieced together to show the extent and need 
of sickness insurance in the United States. No figures exist from 
which we may estimate accurately the probable amount of loss 
caused by sickness in this country, but a comrrtittee of experts acting 
for the American Association for Labor Legislation has estimated 

^^Adapted from "The Practicability of Compulsory Sickness Insurance in 
America," in the American Labor Legislation Review, IV, 52-53 (1914). 



544 CURRENT ECONOMIC PROBLEMS 

that annually there are 248,750,000 days of sickness among workmen 
in the United States, costing $792,892,860. The United States Bu- 
reau of Labor reports that every workman in the steel industry has 
the expectation of 9 days lost by sickness in a year as against 4 days 
lost by accident, a significant proportion when we reaHze that it does 
not cover the cases of men forced by sickness to quit entirely, and 
that only the sick leave their work. 

The burden is not borne entirely by the working people. Sums 
which would undoubtedly amount to considerable in the aggregate 
are paid by employers as wages to sick employees and to the differ- 
ent insurance funds in which both employer and employee are in- 
terested. The extent of the contribution of private charity may be 
guessed by the statement of the New York Association for Improv- 
ing the Condition of the Poor, that 40 per cent of the persons 
helped by it in 1912 became dependent on account of sickness, a 
proportion, which, according to most authorities, is rather higher 
than the average. The contribution of the state and the public, 
through the support of hospitals and dispensaries, is a large figure. 
Studies of social conditions in New York City show that the dis- 
pensary and the hospital are the principal resources in sickness of 
the poorest paid classes of workmen. 

These sums, large though they must be in the aggregate, leave 
the huge bulk of the cost of sickness on the shoulders of the work- 
men themselves, and to lessen in individual cases its crushing weight, 
often increased by the cost of burial, a widely extended system of 
sickness and burial insurance has grown up. There are a variety 
of carriers of this insurance: (i) Industrial and assessment, sick- 
ness and burial insurance companies and associations; (2) estab- 
lishment funds; (3) the lodges of large fraternal' orders and small 
local societies frequently affiliated with a church in foreign com- 
munities ; (4) labor-union locals, and, to some extent, national or- 
ganizations. The usual form of benefit is a cash payment in the 
event of death and a weekly payment to a person who is unable to 
earn from sickness or accident. 

268. Why Sickness Insurance Should Be Compulsory^^ 

BY I. M. RUBINOW 

The lesson of history is strongly in favor of the compulsory 
principle in connection with sickness insurance. The considerations 
which have led to this conclusion are as follows : 

^^ Adapted from "Standards of Sickness Insurance," in the Journal of 
Political Economy, XXIII, 226-227 (1915)- 



ECONOMIC INSECURITY 545 

1. The demonstrated inability to bring the neediest strata of 
the working class into the system by any measure short of com- 
pulsion. Under all voluntary systems the proportion of the insured 
in a definite labor group is in inverse ratio to its economic status. 
Ability and willingness to meet the cost of insurance presuppose 
the existence of some surplus in the budget and a sufficient cultural 
status for an appreciation of the advantages of the insurance prin- 
ciple. Both are least present in the lower strata of the wage-work- 
ing class where disease is most frequent and the economic need 
caused by disease greatest. Experience has proved that only by 
compulsion can these be reached. 

2. Shifting the burden of insurance. A study of the social 
causes of disease establishes at least a partial responsibility for ill- 
ness on the part of industry and society. Justice would require 
that industry and society should share in the cost of sickness insur- 
ance. But besides this argument of abstract equity, there is the 
economic fact that for a large proportion of the wage-workers the 
earnings are such as to make the cost of insurance too heavy a bur- 
den. Both equity and necessity require that at least a part of the 
burden be shared by other classes in society. The subsidized volun- 
tary system recognizes this, and endeavors to relieve the burden by 
a state or local government subsidy. But only through a compul- 
sory system does it become possible to shift part of the cost upon 
the employer and upon industry at large. The essential feature of 
compulsion is exercised upon the employer who is forced to meet 
part of the cost. 

3. Standardization of the insurance system. Not only the 
quantitative, but also the qualitative development of the insurance 
system must be considered. It is important that not only all strata 
of working men be insured, but that the services rendered by the 
insurance institutions be effective and capable of meeting the prob- 
lems which call for sickness insurance. Under a subsidized system 
an effort is usually made to accomplish this result by exacting cer- 
tain conditions before the result is granted. At best the require- 
rrtents of a voluntary system cannot be far above the actual practice 
of the organizations existing at the time, or otherwise it is in danger 
of failing entirely. It is necessary, as in Germany and Great Britain, 
to enforce definite minimum requirements, which are adjudged 
practical and necessary, while the very contribution from industry 
makes a higher minimum possible. 



546 CURRENT ECONOMIC PROBLEMS 

269. The British National Insurance Bill 

BY WARREN S. THOMPSON 

The British National Insurance Bill is England's most momen- 
tous piece of social legislation, if indeed it is not the world's. It is 
largely the result of an extended visit which Mr. Lloyd-George made 
to Germany in 1908. He left Germany fully convinced that national 
insurance was the proper method of dealing with the conditions 
which the reports on the Poor Law showed to stand in dire need of 
immediate alleviation. The significant part of the bill is that which 
deals with health insurance. Only that part will be discussed here. 

Under the provisions of the part relating to health all wage- 
earners who receive less than £160 annually, are compelled to insure 
their health. Those exempted are for the most part in Government 
employ, and already entitled to benefits, and those who are not 
dependent upon their work as their chief means of livehhood. The 
best actuaries estimate that about 9,200,000 men and 3,800,000 
women will become members of "approved societies" when the law 
goes into effect. It will be six months before any benefits are 
granted and two years before anyone will receive "disablement" 
benefits. 

The contributions are payable weekly. They are divided be- 
tween the employer, the workman, and Parliament, as follows : for 
the men, the employer pays 3, the workman 4, and Parhament 2, out 
of a total of 9 pence ; for the women, the employer 3, the working- 
woman 3, and Parliament 2, out of a total of 8 pence. Special provi- 
sion is made in the case of those who receive very low wages for the 
employer and Parliament to pay either the entire contribution or all 
of it but I penny. The employer is held responsible for the pay- 
ment, both of his own contribution and that of the employee. The 
payment is made by the use of stamps and the employer is author- 
ized to deduct the employee's contribution from his weekly wage. 

There are five benefits to be given: (i) Medical benefit. This 
includes medical attention and the necessary drugs when one is ill, 
and may be extended to the dependents of the injured person when 
the authorities have the means and deem it advisable. (2) Sana- 
torium benefit. This entitles a member who has tuberculosis or a 
similar disease to be treated in a sanatorium when it is needed. 
This benefit also may be extended to the dependents of the injured 
person. A definite amount, i shilling 4 pence is available for each 
member annually for the payment of this benefit. This amount must 
not be exceeded unless the local authorities and the Treasury vote 
extra aid. (3) Sickness benefit. This is a cash payment made 



ECONOMIC INSECURITY 547 

weekly to the insured person or his dependents and continues for 
26 weeks. In the case of men it is 10 shillings a week for the first 13 
weeks and 5 shillings for the second 13 weeks; in the case of women 
7 shillings 6 pence for the first 13 weeks and 5 shillings for the 
second 13 weeks. If the financial condition of the society permits, 
the benefits for the second 13 weeks may be increased. (4) Disa- 
bility benefit. This is a weekly payment of 5 shillings to a member 
who is temporarily or permanently disabled as the result of sickness 
or accident not in any way connected with his work. It lasts "so 
long as he is rendered unfit by the disease or disablement." (5) 
Maternity benefit. This is a lump sum of 30 shillings paid upon the 
birth of a child, either when the mother herself is insured or when 
she is the wife of an insured man. In addition to these, other bene- 
fits may be granted, if the financial condition of the society permits 
it. The benefits are decreased when the person is in arrears with his 
contribution, when he is under age and not married, and when he 
is past 50 at the time of becoming insured. 

If a person is not so employed as to become a regular member, 
he may join a society as a voluntary contributor. The rate at which 
he pays is determined by his age at entrance. Adequate provision is 
made to allow the transfer of a member from the voluntary to the 
employed rate and vice versa. Since there is no contribution from 
the employer in the case of a voluntary member, this amount must be 
paid by the member. The contribution from Parliament is the same 
as in the case of the regular member, and the benefits he receives 
are the same. 

A deposit contributor is one who cannot obtain admission to an 
approved society either as an employed or a voluntary contributor. 
He deposits his savings in the post office in a manner similar to our 
Postal vSavings Bank system. From his deposit, after it is subsi- 
dized by Parliament, the proper amount is deducted to entitle him 
to medical and sanatorium benefits. For the other benefits he can 
merely withdraw the remainder of his .subsidized deposit. 

There are two separate organizations for the administration of 
benefits. A local Health Committee is established for each county 
and county borough. This committee in conjunction with the local 
authorities already existing administers the medical and sanatorium 
benefits. The other benefits are administered by approved societies. 
The reason for this division of labor is that Friendly Societies, hav- 
ing millions of members, already give benefits of various sorts. It is 
intended not to interfere with the other activities of these societies, 
but to have them estabhsh separate branches to administer the re- 
maining health insurance benefits. Any society which does this may 



548 CURRENT ECONOMIC PROBLEMS 

become an approved society, provided it is not carried on for profit 
and is subject to the control of its members. The approval rests 
with the Insurance Commissioners. 

Many details of the scheme are fully set forth in the bill, but 
many others are left to the Insurance Commissioners. Their rules 
and regulations are, of course, subject to the approval of ParHament. 
Strange as this delegation of legislative power seems, there is little 
doubt that it will contribute much to the initial success of the 
scheme. The commission will be able to adapt many of its regula- 
tions to exigencies as they arise and thus correct at once many of 
the defects which are bound to appear upon the launching of this 
mighty scheme. 

270. Old-Age Pensions in New Zealand^® 

BY w. P. re;evi;s 

Though dire poverty in New Zealand is almost confined tO' the 
aged, to disabled workers, to deserted wives and children, still 
even the Fortunate Isles have not escaped the cause of pauperism. 
The State has not only to provide hospitals, but also to furnisli 
what in the colonies is called Charitable Aid. Even under a liberal 
system of poor relief pauperism is keenly felt by the better class 
of the aged poor. Hence public opinion was quite ready for the 
proposal O'f an Old Age Pension Law. 

When such a law was at length proposed, opposition to it, as 
expressed in the debates, seems to have been based on the conten- 
tion that it was likely to burden the colony needlessly and increas- 
ingly sap the springs of self-reliance, and tax the thrifty for the 
benefit of the improvident. On behalf of the Act supporters dwelt 
with considerable force upon the ups and downs and inevitable 
accidents of coloriial life. They pointed out that in New Zealand, 
as in all countries occupied in growing raw materials for Europe, 
times of prosperity are invariably^ followed by periods of contrac- 
tion and depression, when the savings even of the most thrifty of 
the poorer classes may be inevitably swallowed up in struggling with 
unemployment. Much stress was laid upon the uncertainty of in- 
vestments into which work-people are constantly tempted to put 
their small savings. The House was reminded of notorious in- 
stances in which the very thrift of careful workers had led to their 
ruin by exposing them to the calls levied by the liquidators of bank- 
rupt financial companies in which they had invested their money. 
Speakers suggested that the virtues of thrift in the case of married 

^^Adapted from State Experiments in Australia and New Zealand, 243-281 
(1902). 



ECONOMIC INSECURITY 549 

work-people might easily be exaggerated, since tO' bring up a half 
dozen children decently required a breadwinner's whole earnings. 

The act, as finally passed, is not universal. Every deserving 
old man and old woman who has lived in the colony for twenty- 
five years continuously is entitled to a state pension, the maximum 
of which is i 18 a year. But the proviso and conditions with which 
the act is hedged about are such that not more than 40 per cent of 
the aged are at all likely to be found entitled to it. Nor did those 
who passed the act intend that any larger proportion should be. 
The full £18 is paid only to those whose yearly income from all 
source is less than £34. From £34 to £52, £1 is taken off for every 
£1 of income. Old women have exactly the same title to the pension 
as old men. Applicants must not have been absent mo're than two 
years altogether from New Zealand during the quarter ,of a cen- 
tury preceding the application. They must be subjects of His 
Majesty, and, if naturalized subjects, must have been naturalized 
five years. The would-be pensioner, moreover, must bring evidence 
that he or she for the previous five years has led a sober and repu- 
table life, and is of good moral character. A pensioner may at any 
time forfeit his pension, if convicted of serious crime, or if proved 
to be leading a drunken, riotous, or spendthrift life. 

The criticisms which have been brought against the act are: 
first, that it permits designing persons to impose on the govern- 
ment; second, that its cost is too heavy; and third, that it dis- 
courages thrift. Opponents of the policy have claimed that many 
of the pensioners have wasted in drink money that they should 
have saved. Another complaint has been that children wealthy 
enough to support poor parents without serious inconvenience have 
taken advantage of the Act to transfer this duty to the State. The 
case has been cited of an old couple divesting themselves of their 
property, deeding it to a daughter who is married, and after this 
applying for a pension. It is said that they now live with the 
daughter on the land that was their own, and drive in a pony- 
chaise once a month to draw the money. 

The cost of the system, two hundred thousand pounds a year, 
is a substantial burden. But times are very good in New Zealand 
just now, and a prosperous colony with a growing revenue can 
afford to be bold. 

On the vexed question oi the effect of free pensions upon thrift 
among the poor, it may be pointed out that no contributory scheme 
is perfect. This act certainly does not offer any direct and specific 
encouragement to thrift. Yet, so meager an allowance as a shil- 
ling a day deferred to an age which most people do not reach. 



550 CURRENT ECONOMIC PROBLEMS 

scarcely offers an inducement likely to interfere with the daily 
habits and plan of life of the very poor. People whO' were thrifty 
before are not likely to be unthrifty now. And, among the lowest 
grade of wage-earners, it is questionable whether thrift is a virtue 
or not. Certainly it would be easier tO' teach this class to spend 
wisely than to teach it to save. Defects the Act probably has, but 
they are not its essence. It has come to stay. 

E. THE STANDARD OF LIVING 
271. The Nature of the Standard of Living^ '^ 

BY FRANK HATCH STrEIGHTOFF 

"How can these people endure it?" asked the fair boarder, clos- 
ing her novel and languidly sinking into the depths of her hammock. 
"Mr. Farmer drudges from four a. m. till dark, and never a visible 
result ! He's never been to the theater ! Why, he hasn't even read 
The Balance of Power. I don't call that living — it may be existing." 
Such words are heard every day in rural summer resorts. Corre- 
sponding sentiments are entertained by many a farmer who cannot 
see how his guests are held by the chaotic buzz of the metropolis. 
The people of one city block "couldn't be hired" to move to certain 
other squares ; yet the respectable inhabitants of these latter dis- 
tricts "wouldn't be buried from Z Street." It is really amusing to 
notice how the words "live" and "exist" are contrasted, but the dis- 
tinction is merely the expression of the fact that "consciously or un- 
consciously every man whose means, or wealth, or resources are 
more limited than this wants — and this is practically the case with 
human beings generally — has a scale of wants in his mind when he 
arranges these means. On the basis of this scale he satisfies what are 
his most urgent wants and leaves the less urgent ones unsatisfied."^^ 
In other words, every man has his own "standard of living." 

Satisfactorily to define the standard of living is extremely diffi- 
cult. Bullock writes, "Each class of people in any society is accus- 
tomed to enjoy a greater or less amount of the comforts or luxuries 
of life. The amount of comforts or luxuries customarily enjoyed 
forms the standard of living of that class. "^^ That is to say, the 
standard of living, as the expression is usually understood, consists 
simply of what men do actually enjoy. On the other hand there 
are always felt but unsated wants that prompt men to struggle; 

"Adapted from The Standard of Living among the Industrial People of 
America, 1-4. Copyright by Hart, Schaffner & Marx (1911). 
^^Smart, Introduction to the Theory of Value, 22. 
^^Introduction to the Study of Economics, 126. 



\ ECONOMIC INSECURITY 551 

these reasonable unfilled desires are the motive powers to progress. 
Few indeed are the women who do not confidently whisper to their 
friends, "We cannot do that now, for we are rather poor this year." 
There is an "ideal" standard of living which is always in advance 
of achieved satisfaction. 

The definition given here is valuable in suggesting two impor- 
tant truths. First, it properly emphasizes comforts and luxuries. In 
everyday affairs effort is often directed more to securing superflu- 
ities than in providing necessities. In the second place, the extent 
and content of the unsated wants in a man's ideal standard is largely 
determined by actual satisfactions. 

Each individual has his own more or less rational concept of 
what is essential to the maintenance of his own social position; and 
he knows exactly what this position is, whether he be the bank clerk 
who delights in race horses, or the man who shares the same desk 
and plays on the Sunday-school ball team. The one demands 
"smart" raiment and amusement at highly nervous tension, the other 
wants respectable, serviceable clothes and healthy sport. They live 
in different worlds, they have individual criteria : so each man has 
his own standard of living. But it will be noted that bank clerks as 
a class have some wants in contrast to the mechanics, for instance. 
The clerks must enter their offices clean-shaven, the mechanics like 
a good scrub after work; the former wear kid gloves and fresh 
linen, the latter are more comfortable in woolen gloves and flannel 
shirts. These contrasts and comparisons can be extended until the 
standard of each group can be determined with considerable pre- 
cision. Thus the class standard of living may be compared to a 
composite photograph ; certain features are emphasized, while others 
are faint or blurred according to the proportion of the individuals 
possessing the character. On the other hand, development of the 
individual is so largely influenced by his environment that his notions 
are, in the main, those of his class. 

But class is not the only factor in the development of the indi- 
vidual's ideal standard of living. Aside from its large determining 
influence in the matter of class membership, income has an import- 
ant part to play; purchasing power limits the quantity and quality 
of obtainable satisfactions. The higher the individual climbs on the 
ladder of success, the wider is his view ; the more he sees, the more 
he seeks. 

Another determinant of the standard of living is the progress of 
civilization. The modern carpenter has far more comfort than 
Richard II dreamed of, simply because progress has put new things 
within his reach, but the carpenter knows that there are many, many 



552 CURRENT ECONOMIC PROBLEMS 

things which he cannot have. Thus there is a constant, though ir- 
regular rise of the standard of Hving as civilization becomes more 
complex. 

272. A Wage-Earner's Budget-" 

BY Louise; bolard more; 

This household consists of father and mother, both born in Ire- 
land, and two boys, 8 and 9 years of age. The man is a steady, tem- 
perate, unskilled laborer. Neither Mr. nor Mrs. R. have known any 
higher plane of living than their present surroundings; both are 
uneducated, but the woman especially possesses considerable native 
thrift and intelligence. This family is representative of the average 
family of this size on a fairly steady income of $12 a week, with no 
drink, sickness, or unusual conditions to make it abnormal. The 
man was out of work for six weeks in the year, but that is not un- 
usual. The woman is neat, honest, and reliable, and tries hard "to 
get ahead." For three months the man had night work as stable- 
man at $13 a week. The family has never been dependent, but 
while the man was out of work a sister gave them $25 as a present, 
and they were obliged to draw $10 from the little which they had 
saved in the bank. The total income for the year was : 

Mr. R. : 33 wks. at $12.00 

" 13 wks. at 13.00 $565.00 

Drew from Bank 10.00 

Gift from sister 25.00 ■ > ' 

Total $600.00 

The estimated expenditures were as follows : 
Rent — 2 mos. at $10.00, 7 mos. at $12.00, 3 mos. at $11.00. .$137.00 

Food — From $4.00 to $7.00 a week 277.00 

Drink — (pint of beer at supper daily) 36.40 

Clothing 40.00 

Light and fuel 52.00 

Insurance from 50 to 75 cents a week 29.25 

Papers, 1 1 cents a week 5.72 

Church, 35 cents a week (for 50 weeks) i7-50 

Man's spending-money 25.00 

Sundries 2.63 

, Total $622.50 

Deficit 22.50 

This deficit consisted of bills owing to the butcher and grocer 
amounting to $10, back insurance payments equal to $2.50, and 
clothing bought "on time" on which $10 was still unpaid. The rent 
varied because the family had moved twice in the year, looking for 

'"Adapted from Wage-Earners' Budgets, 163-167. Copyright by Henry 
Holt & Co. (1907). 



\ ECONOMIC INSECURITY 553 

cheaper rent. The last rooms, for which they paid $10 a month 
rent, were three dark, small rooms. The light of the "parlor" at the 
back of the tenement was almost shut off by a large factory built 
close to it. The windows in the kitchen and bedroom opened on an 
air-shaft. The rooms, however, were very neat, lace-curtains at the 
windows, plush furniture, pictures of the family, carpet on the floor, 
and all the bric-a-brac usual in homes of this class. There was a 
white iron bed in the bedroom, with the customary folding-bed for 
the children. 

The expenditure for food varied greatly. A budget kept for a 
week showed $7 spent for food, but Mrs. R. said they could only 
spend that much when the man was working steadily or when there 
was no rent to pay. The weeks in which semi-monthly payments of 
rent were made, the food allowance was cut down to about $4 a 
week. Whenever there was any unusual expense the food suffered. 
During the six weeks the man was not working they did not spend 
more than $4.50 a week for food. This is an illustration of a very 
common condition among wage-earners and is due to the fact that, 
on the prevailing rate of unskilled wages, it is difficult if not impos- 
sible for a family to prepare for such emergencies. Mrs. R. esti- 
mated that $277 had been spent for food in the year, making these 
allowances, and that the average per week would be about $5.33. 
On the whole, the food was adequate and wholesome, and the entire 
family appeared to be in good condition. They had no illness dur- 
ing the year. 

The standard of dress is classed as "medium." They had few 
clothes, but took good care of them. The father had plain working- 
clothes, the mother always wore wrappers at home, and only had 
one street dress, as she never went anywhere except to church. The 
boys were neat and clean. Mrs. R. bought clothing "on time" — she 
was ashamed of it, but said the boys could not have new suits for 
Easter unless she did. She itemized the expenditures for clothing 
for the year as follows : 

Man, I pair shoes $ 2.00 

Woman, i pair shoes 1.25 

Two boys : 2 suits 7.00 

2 overcoats 11.00 

4 pairs shoes at 75 cts., 

4 pairs at 69 cts 5.76 

Mending shoes 2.80 

2 pairs pants, $1.00; 4 sets under- 
wear $1.60 2.60 

4 shirt-waists; 2 at 50c and 2 at 30c. . . . 1.60 

4 caps 70 

Miscellaneous 5.29 

Total $40.00 



554 CURRENT ECONOMIC PROBLEMS 

Mrs. R. cannot sew, and buys all their clothes ready-made of a 
cheap quality, but the little boys are not hard on their clothes. Her 
sister knits stockings for the entire family. 

The expenditure for coal and gas and oil was rather high, owing 
to the dark rooms. Coal was bought by the bushel, and the man 
brought home wood free for kindling. Gas was burned in two 
places where they lived, and the gas-bills for nine months amounted 
to $11.20. In all, coal cost $37.75 (at $ .25 a bushel), and oil for 
three months about $3.05 — total $52. 

This family did not spend one cent for recreation, except what 
the father had out of his "spending-money." This was very little, for 
while he was earning $12 a week his wife gave him not more than 
$ .40 a week and often only $ .25 ($ .15 for tobacco and $ .10 for 
a shave), but when he earned $13 a week (for 3 months) he kept 
out a dollar a week for "spending-money." His allowance for the 
entire year would not exceed $25. He gave all the rest to Mrs. R., 
who said he was a "model husband." They are very religious and go 
to the Catholic Church every Sunday, only missing two Sundays in 
the year. They pay 10 cents each for a seat, put 10 cents in the col- 
lection, and give the boys 2 or 3 pennies for the collection, making 
a total of $ .35 a Sunday. 

They were all insured for $ .50 a week, $ .15 for the man, $ .15 
for the woman, and $ .10 each for the boys, until the man's wages 
were raised to- $13, when his wife raised his insurance policy and 
paid $ .40 a week for him. This extra amount was more than they 
could afford to pay, for in those 13 weeks they dropped behind $2.50 
on the insurance payments. 

The only reading is the penny papers. The boys are sent tO' the 
parochial school, and the parents are very ambitious for them. Un- 
less sickness or unemployment comes, this family will be able to 
make up the deficit of $22.50 on the man's wages of $13 a week, 
but it is very evident from a study of these expenditures that it will 
be impossible to save any considerable sum for the future. 

273. Life at $1.65 a Day^^ 

BY MARGARET F. BYINGTON 

Let US consider how the economic problem of life can be worked 
out on $1.65 a day. 

With the single men the problem is, of course, a simple one. 
Many care little how they live so long as they live cheaply. One of 
the lodging-houses which I visited consisted of two rooms one above 
the other, each measuring perhaps 12 by 20 feet. In the kitchen 

"Adapted from Homestead; the Households of a Mill Town, 138-143. 
Copyright by the Russell Sage Foundation (1910). 



ECONOMIC INSECURITY 555 

was the wife of the "boarding boss" getting dinner — some sort of 
hot apple cake and a stew of the cheapest cuts of meats. Along one 
side of the room was an oilcloth-covered table with a plank bench 
on each side ; above it a rack holding a long row of handleless white 
cups and a shelf with tin knives and forks. Near the up-to-date 
range, the only piece of real furniture in the room, hung the "buck- 
ets" in which all mill men carry their noon or midnight meals. In 
the room above, double iron bedsteads were set close together and 
on them comfortables were neatly laid. In these two rooms, beside 
the "boarding boss," a stalwart Bulgarian, his wife, and two babies, 
lived 20 men. 

The "boarding boss" runs the house and the men pay $3.00 a 
month for a place to sleep, for having their clothes washed, and 
their food cooked. In addition, an account is kept of the food pur- 
chased and the total is divided among the men on pay day. The- 
housewife also purchases and cooks any special food a man orders ; 
beef, pork, lamb, each with a tag of some sort labeling the order, 
will all be fried together. A separate statement for each boarder 
is kept of these expenses. 

Such an account for a group of men in a small Slavic household 
may prove of interest. The family, consisting of a man, his wife, 
his brother, three children, and four boarders occupied a house of 
four rooms, for which they paid a rent of $14.00. The man earned 
only $10.80 a week with which to meet the needs of a growing fam- 
ily. One-half the cost of the food was paid by the boarders, includ- 
ing the brother, and amounted for each man to about $1.06 a week. 
The expenditures for the week were: vegetables, $1.06; fruit, $0.56; 
milk, eggs, etc., $1.98 ; sugar, $0.49 ; sundries, $0.76 ; and meat, $5.78, 
making a total of $10.63. Beef, pork, veal, eggs, milk, cheese, and 
fruit were ordered as "extras" by the five boarders in varying pro- 
portions. Upon these each spent from $3.00 to $4.00. 

The average expense for each man including his share of the 
general sum, together with the amount spent individually, was 
about $8.02 a month. Adding $3.00 a month for room and wash- 
ing, the total expense to each was about $11.00 a month. In pros- 
perous times these men make from $9.90 to $12.00 a week. It is 
obvious, therefore, that if the fixed expenditure of these single 
men is less than $3.00 a week, a large margin remains over and 
above clothes for saving or indulgence. They can thus send for 
wife and children, fulfil their duties to aged parents, live high ac- 
cording to their lights, or make provision for their own future. 

But nearly half of the men employed in the mill have families 
to support, usually on the same wage. How does the other half 



556 CURRENT ECONOMIC PROBLEMS 

live? Let us take the average expenditure of ten Slavic budget 
families without boarders, earning less than $12.00 a week, whose 
total average expenditure was $10.03 ^ week, 13 cents above the 
usual day laborer's regular wage of $9.90. The figures are as fol- 
lows : Food, $4.68; rent, $1.62; fuel, $0.27; clothing, $1.57; other 
housekeeping expenses, $0.13; tobacco, $0.07; liquor, $0.55; insur- 
ance, $0.77; other expenses, $0.41. 

This distribution of expenses is fairly representative of the 
amount of money the Slavs can count on unless they work overtime 
or take in lodgers. The $1.62 a week for rent provides only for a 
one- or two-room tenement, two rooms in one of the undesirable 
houses costing $8.00 a month. With an average expenditure in this 
group of $4.64 a week, the cost of food for the average family 
would equal 20 cents a day per grown man, 2 cents a day less than 
the estimate for essentials. 

To show the food value of their provisions, we must rely upon 
the statement of the average expenditure of one family, including 
man, his wife, and three children, twelve, three and nine months 
old. The family was dependent on the man's earnings of $9.90 a 
week. The food expenditures for a week were : bread, $0.75 ; 
baker's food, $0.03; meat, $1.46; flour, $0.26; potatoes, $0.25; other 
vegetables, $0.09; dried beans, $0.06; eggs, $0.24; milk, $0.11 ; but- 
ter, $0.38; cheese, $0.05; fresh fruit, $0.13; sugar, $0.14; tea, $0.08; 
coffee, $0.76; and sundries, $0.40. The total is $5.19, making an 
average of $0.74 a day. This is $0.23 a day on a grown-man-unit 
basis. 

The nutritive value of the food was probably a little below the 
requisite amount. In all probabiHty these Slavic women are not 
skillful buyers — the accounts consist of a rather monotonous iter- 
ation of "bread, meat — bread, meat" that does not promise an in- 
spiring diet. The expenditure for clothing among the ten families 
was below what is estimated as essential. No money was expended 
for furniture; a fact borne out by the utter bareness of the two- 
room houses of many of the laborers. With the exception of insur- 
ance and comparatively high expenditure for liquor, these figures 
indicate that life measured in terms of possessions is at a low ebb 
among the Slavic laborers. And what has become of the margin 
which was to make possible the attainment of that old-country am- 
bition, a bit of property and a bank account? Some other means 
must be found to achieve these ends. 

That device is to take in lodgers. The income from this source 
is no mean item. Of 102 families investigated, three-quarters 
received from lodgers a sum at least equal to the rent, while a 



ECONOMIC INSECURITY 557 

fifth received twice the amount of the rent or more. A glance at the 
sources of incomes of the famihes suggests that among the Slavs 
themselves the wages of an unskilled laborer are considered insuffi- 
cient to support a family, even according to very low standards. 

274. A "Fair Living Wage"^^ 

BY LOUISE BOIvAND MORE; 

What, then, is a "fair living wage" for an average family? The 
Massachusetts Bureau of Statistics puts it at $724 a year for a family 
of five ; the New York Bureau of Labor at $520 ; Mr. John Mitchell, 
President of the United Mine Workers of America, at $600; Mr. 
Robert Hunter, author of "Poverty," says $460 (for actual and 
necessary expenses) ; and Dr. Edward T. Devine, Secretary of the 
Charity Organization of New York City, estimates $600 as a mini- 
mum. These estimates were all made at periods of lower prices 
and cost of living than the present (1906). 

A "fair living wage" should be large enough not only to cover 
expenses which Mr. Rowntree calls "necessary for maintaining 
merely physical efficiency," but it should allow for some recreation 
and a few pleasures, for sickness, short periods of unemployment, 
and some provision for the future in the form of savings, insur- 
ance, or mem.bership in benefit societies. 

The whole question of a fair wage depends primarily on the 
amount and cost of food necessary for proper nutrition. If a man 
is underfed, he must underwork, as Mr. Rowntree says ; his children 
are stunted in growth and intellect, and when a man is unfit for 
work he fails to get it or works for the lowest wages. Mr. Rown- 
tree adds : "The most hopeless condition of the poor, as every social 
worker knows, is unfitness for work. Unfitness for work means low 
wages, low wages means insufficient food, insufficient food means 
unfitness for labor, and so the vicious circle is complete." 

This investigation has shown that a well-nourished family of 
five in a city neighborhood needed at least $6 a week for food. 
The average for 39 families, having five in the family, was 
$327.24 a year for food. If we consider $6 a week (or $312 a 
year) as 43.4 per cent of the total expenditure (which was the 
average percentage expended for food in these 200 families, and 
very near the average for the workingmen's families in the exten- 
sive investigation of the Department of Labor), the total expendi- 
ture would be about $720 a year. It therefore seems a conservative 
conclusion to draw from this study that a "fair living wage" for 
a workingman's family of average size in New York City should be 

'^"Adapted from Wage-Earners' Budgets, 268-270. Copyright by Henry 
Holt & Co. (1907). 



SS8 CURRENT ECONOMIC PROBLEMS 

at least $728 a year, or a steady income of $14 a week. Making 
allowance for a larger proportion of surplus than was found in 
these families, which is necessary tO' provide adequately for the 
future, the income should be somewhat larger than this, — this is, 
from $800 to $900 a year. 



F. THE MINIMUM WAGE 
275. The Promise of a Minimum Wage^^ 

BY A. N. HOIvCOMBE; 

The immediate direct effect of the establishment of a minimum 
standard-of-living wage would be to put an end to the employ- 
ment of normal adult workers at lower rates. Not every wage- 
worker who has been employed at lower rates would necessarily 
be deprived of employment, nor would the wage of every such 
wage-earner necessarily be increased to the standard minimum rate. 
Some employees would receive the increase, and some would lose 
their employment. The actual effect would depend partly upon the 
efficiency of the wage-earners concerned, and partly upon the char- 
acter of the demand for their services. In industries like depart- 
ment stores and steam laundries, which serve local markets and are 
free from outside competition, probably the increase of wages could 
be paid to all employees below the minimum without so increasing 
the cost of production as to pro'duce a material decline in the de- 
mand. But in industries serving a wider market and subject to out- 
side competition, such as cotton mills and shoe factories, the estab- 
lishment of a legal minimum: wage might reduce employment rather 
than increase wages. The outcome would depend largely upon the 
extent of the necessary increase and the rapidity with which it 
should be put in force. Some sweated industries might be alto- 
gether incapable of maintaining themselves. But such as these the 
country would be better without. 

The greatest difficulty arises in the cases where work-people of 
distinctly different standards of living come into competition with 
one another. Unless the groups are of equal efficiency, the attempt 
to establish a single standard for all might result in securing the 
industry to the most efficient group and excluding the others from 
all employment therein. To attempt to establish an American stand- 
ard-of-living wage for alien races of distinctly lower standards and 
lower efficiency would probably result in the exclusion of many 
aliens from employment in the country. It would also result in the 
exclusion of most of the negroes from the occupations in which the 

"^Adapted from an article in the American Economic Review, II, 2Z-2i7- 
Copyright (1912). 



ECONOMIC INSECURITY 559 

wage should be adjusted to the efficiency of the native whites. A 
legal minimum wage would probably be of advantage in promoting 
a better distribution of such immigrants among our various 
industries. 

The indirect economic effects of the establishment of a minimum 
standard-of-living wage may be mentioned summarily. 

First, the establishment by legislation of such a wage would 
make available to the poorest and most helpless of the laboring 
population a share in the advantages obtained by the better-to-do 
and stronger through voluntary association. An advantage would 
be the greater security for the protection of the interests of the 
public against the abuse of irresponsible power in the interests of 
special classes. 

Secondly, the line would be more sharply drawn between the 
unemployable and the merely unemployed. It would also tend to 
restrict the influx of the unemployable from abroad, thus at once 
checking the increase of inferior labor and raising the average 
efficiency of the domestic supply. 

Thirdly, there would result a restriction of the field of competi- 
tion between workpeople. The wage-earner whose chief recom- 
mendation is his willingness to work for a pittance would lose the 
advantage of his submissiveness, and skill and strength would 
become of greater importance in obtaining employment. 

Fourthly, there would result a restriction of the field of com- 
petition between employers. The employer whose chief stock in 
trade is his shrewdness in driving hard bargains would lose his 
advantage. The peculiar qualities of the best type of business men 
would be of greater importance in the achievement of success. 

276. The Case for Wage-Boards^* 

BY Constance; smith 

Many of the objections ordinarily advanced against Wages 
Boards, or, indeed, against any proposal to regulate wages, are 
'little more than a re-statement of the arguments employed to defeat 
the passing of the earHer Factory Acts. They rely for support on 
the principle, more or less disguised, of laisses faire. But there 
are some, more strictly addressed to the practical proposal now 
before the country, to which it seems desirable to give such brief 
consideration as space permits. 

^^Adapted from The Case for Wages Boards, 75-86. Published by the 
National Anti-Sweating League, London (1911). 



56o CURRENT ECONOMIC PROBLEMS 

First, there is the fear frequently expressed, that Wages Boards 
would increase unemployment, by pushing out of the labor market 
the less competent worker, who is unfit to earn even the minimum 
rate, and by giving the coup de grace to weak and tottering indus- 
tries. The existing Wages Boards legislation of Victoria, makes 
special provision for the case of the old and slow worker. But 
granted that there are individuals of this class who will be unable, 
under the new conditions, to find employment, even at special rates, 
there still remains the question whether it is not wiser, on purely 
economic grounds, to face boldly the necessity of maintaining for a 
while a certain number of persons physically or mentally incapable of 
fully maintaining themeslves, rather than of condemning to "half 
employment" an infinitely greater number of people who, given a 
fair chance, are perfectly able to earn their own living. 

But sound economists who have carefully studied the subject 
do not hold that under a Wages Board system we should have a 
"net" reduction of employment. Since the first result of the estab- 
lishment of such a system will be an increased wages bill, involving 
the transference of a fresh portion of wealth to the pockets of 
certain classes of workers, there must at once follow an increased 
purchasing power on the part of those workers and a raising of the 
general standard of consumption in the community. Workers will 
not only buy more, but better articles, and this movement must in- 
evitably tend both to greater volume and greater regularity of 
employment. 

With regard to those industries which are so deficient in capital 
or in organization that they can only maintain a precarious foot- 
hold in the competitive area by under-payment of the workers they 
employ, it is clear that the community would be better off for their 
disappearance. 

Would the cost of production, and consequently the price of the 
article to the consumer, be greatly raised by the establishment of 
minimum rates? Daily experience shows that, in a considerable 
number of industries, there is a margin which could safely be drawn 
upon for the levelling-up purposes of a minimum rate. Cases are 
not infrequently found, for instance, in trades employing women's 
labour at a sweated wage, where vigorous representation on behalf 
of the workers, acting upon a wholesome fear of publicity on the 
part of the employing firm, has produced a considerable increase, 
amounting on occasion to something like a doubling of the rate of 
pay. It must be remembered, further, that the cash margin is not 
the only one at the disposal of employers of labour. Human nature 
is lazy, and most people need some stimulus to enterprise. The 



ECONOMIC INSECURITY 561 

economy which is now too often effected by taking a penny or a 
halfpenn}^ off the wages of the employes, would, were that method 
made impracticable by a Wages Board Determination, be otherwise 
contrived; by the introduction of improved machinery, by better 
■ organization, by checking the reckless waste which, where a vast 
quantity of very cheap articles are made by indifferent workers 
labouring desperately against time, swallows up a considerable 
amount of profit every year, and by abolition of the ruinous prac- 
tice of selling under cost price in the case of certain of the articles 
manufactured, in order to make a market for the rest. Further, all 
industrial experience teaches that with the improvement of the 
workman comes improvement also in his work, even where this is 
highly specialized. Nor is cost of production necessarily lowest 
where the' wages are low and the hours long. 

Apprehension is often expressed lest the minimum wage, once 
established in an industry, should become the maximum in that in- 
dustry; and assertions that this actually occurs have not been want- 
ing. Again, there is much testimony from Victoria to support the 
contrary view. Opening, almost at haphazard, the latest Report of 
the Victorian Chief Inspector of Factories, we find, under the 
heading of the Aerated Water Trade Board, "The Determination is 
well complied with, the wages of many of the men and boys being 
above the mmimuni." A similar state of things is found to obtain 
at home in industries where minimum rates have been fixed by 
means of collective bargaining or arbitration under the Board of 
Trade. Here, too, the more skilled, industrious, and capable worker 
is able to earn a higher wage than that calculated on the average 
capacity of the average man or woman. 

The last objection to be considered is what may be called the 
moral objection. Many of those who have not been brought into 
personal contact with sweated workers, and with the conditions 
under which sweated industry is carried on, deprecate the setting up 
of any machinery which appears to limit the opportunity for free 
bargaining between employer and employed. They are afraid that 
such machinery may destroy the spirit of enterprise, and that the 
assumption of responsibility in the matter of wages by the State 
will tend to weaken the personal relation between masters and men. 
To such objectors the best reply is an invitation to study the situa- 
tion at close quarters and at first hand. They cannot then fail to 
perceive that the outstanding features in the present position of the 
sweated worker, especially when that worker is a woman, are 
absolute inability to bargain freely and total lack of independence. 
Such a worker must take the work offered, at any terms that may be 



562 CURRENT ECONOMIC PROBLEMS 

proposed, under penalty of an immediate drop into the abyss of 
destitution. The spirit of enterprise is rarely found to animate those 
who are working excessive hours for a bare pittance. As to the 
"personal relationship," it is useless to devise schemes for preserv- 
ing it; for good or evil, it is practically a thing of the past. More 
and more, industry and commerce, like battleships, tend towards the 
"all big" type. Everywhere, the business that was formerly the 
affair of an individual or a family is now the result of the activities 
of an association or a limited company acting through its salaried 
servants. 

In a great number of cases the employer is practically powerless, 
even now, to deal personally with his employees. In time to come, 
as he becomes increasingly the instrument of great impersonal forces, 
financial and social, behind him, all capacity for such individual 
dealing will be taken from him. It is only by accepting, under the 
sanction of the State, the regulation of wages in those industries 
where it has hitherto gone unregulated, with such results in the 
shape of economic chaos and human degradation as we have been 
considering, that the best employer can save himself from being 
ultimately dragged down to the level of the worst. For him, as for 
his workers, an Act establishing Wages Boards would be a genuine 
measure of protection. 

277. The Progress of the Minimum Wage^^ 

• BY FLORENCE KEIvIvEY 

Minimum-wage legislation was a favorite subject throughout 
1913, when forty legislatures were in session, and state commissions 
were authorized to establish wage rates in California, Colorado, 
Minnesota, Nebraska, Oregon, Washington, and Wisconsin.-^ Com- 
missions were authorized to prosecute inquiries as to the desir- 
ability of such legislation or as to the living wage for women and 
minors in Illinois, Indiana, Ohio, and Connecticut. In 191 5, New 
York, Missouri, and Michigan have made public the results of such 
inquiries. 

Utah dispenses outright with commission and wage boards, and 
establishes a flat rate of wages specified in the statute for girls four- 

"^Adapted from "The Case for the Minimum Wage : Status of Legis- 
lation in the United States," in The Survey, XXXIII, 487-489. Copyright 
(1915). 

""Massachusetts preceded the states enumerated by passing a law provid- 
ing for a Minimum Wage Commission in 1912. 



ECONOMIC INSECURITY 563 

teen to sixteen years of age, for minors over sixteen years, and for 
adult women. 

The commissions of Oregon, Washington, Massachusetts, and 
Minnesota have, during 19 13 and 191 4, promulgated wage rates, 
and the difficulties peculiar to our system of legislation are now 
conspicuously manifest. 

The outstanding characteristics of American rrtinimum-wage leg- 
islation compared with that of England, Australia, and New Zealand 
are three : the first is the omission of men ; the second is its reference 
to the welfare of the people as a whole ; the third, which is respon- 
sible for both the others, is its subordination to the courts on grounds 
of constitutionality, entailing the practice of placing upon American 
states the burden of proof that they are acting within the police 
powers when they create state wage commissions and wage boards 
or conferences. In several states the name "industrial commission" 
or "industrial welfare commission" is deliberately intended to sug- 
gest that here is no apparatus intended merely ip facilitate haggling 
between employers and employees, but an organ of the whole of 
society created to serve the whole, by protecting the health and 
morals of women and minors. 

This is especially conspicuous in the laws of Oregon and Wash- 
ington with their preambles which set forth that : "The welfare of 
the state of Washington [or Oregon] demands that women and 
minors be protected from conditions of labor that have a pernicious 
effect upon their health and morals. The state of Washington, there- 
fore, exercising herein its police and sovereign power, declares that 
inadequate wages and unsanitary conditions of labor exert such 
pernicious effect." The same principle underlies the laws of Cali- 
fornia, Colorado, Minnesota, and Wisconsin. 

Only Massachusetts and Nebraska follow the precedent set by 
England and Australia in requiring that the commission, in making 
determinations, consider also the state of the industry, not exclusively 
the needs of working women. Yet these states express their sense 
of need that the public participate in the process of wage determin- 
ation, Massachusetts by requiring that one member of the commis- 
sion shall be a woman, and in a wage board, with an equal number 
of representatives of employers and employees, there must be one 
or more representatives of the public. Nebraska provides for a 
commission of four members, of which one must be a woman. Both 
Massachusetts and Nebraska limit to mere publicity the penalty for 
failure to pay the minimum-wage rates established by their state 
commissions, neither fine nor imprisonment being prescribed. 



564 CURRENT ECONOMIC PROBLEMS 

The Wisconsin statute provides that the advisory board shall be 
so selected as "fairly to represent employers, employees, and the 
public." Obviously the solicitude for representation of the pubHc 
arises less from fear that its interests may be overlooked than from 
apprehension lest, without such representation, the courts may hold 
minimum- wage laws alien to the police powers of the state. 

Despite these precautions, however, progress is for the moment 
halted. Until the decision of the United States Supreme Court be- 
comes known, no legislature is likely to experiment further in the 
new field." But this is not all. The Minnesota rate-wage estab- 
lished October 23, 1914, to become effective Novemlber 23, has been 
met by a temporary injunction on the ground that "the questions 
presented are important and doubtful," and the pending decision 
in the Oregon case will "doubtless dispose of all the main ques- 
tions involved in the Minnesota statute." 

Some opposition to minimum- wage • legislation has come from 
employers. More surprising is the opposition found, here and there, 
among labor leaders. Samuel Gompers and others have opposed 
all wage-board legislation for men, and have exercised a mildewing 
influence upon such effort even when confined to women. But the 
younger men within the ranks of trade-union leaders show them- 
selves either indifferent or favorable to it. 

These circumstances — the extraordinary powers of the courts, 
and the attitude of certain labor leaders — explain the stage of the 
movement for minimum-wage laws in America compared with Eng- 
land and Australia. The case now pending before the United States 
Supreme Court to determine the constitutionality of the Oregon 
minimum-wage law will settle the fate, for years to come, of effort 
in this field. 

278. The Futility of the Minimum Wage^^ 

BY J. IvAure;nce; laughun 

The hysterical agitation for a minimum wage (today urged 
chiefly for women) has in it no conception of a relation between 
wages and producing power. It is unsound for several reasons 
which touch the very interests of the laborers themselves. 

^'^In the case of Frank C. Stettler and Elmira Simpson v. Industrial Wel- 
fare Commission of Oregon, the state Supreme Court unanimously upheld the 
constitutionality of the Oregon law. An appeal, however, was taken to the 
United States Supreme Court. 

^^Adapted from "A Monopoly of Labor," in the Atlantic Monthly, CXII, 
451-453- Copyright (1913). 



ECONOMIC INSECURITY 565 

It introduces a new and unjustifiable basis of wages — ^^that wages 
shall be paid on the basis of what it costs the recipient to live. If 
it is urged, for instance, that a woman cannot live on $5.00 a week, 
but can live on $8.00 and hence her minimum wage should be $8.00, 
the whole case has not been considered. If we accept — what we 
should not accept — the principle that wages should be related to the 
cost of living, and if it is accepted that the woman could live on 
$8.00 a week, on what grounds should she ever receive more than 
$8.00 a week? On what grounds could any one get $18.00 a week? 
At present $18.00 is paid on the ground that it is earned, that is, 
on the basis of a relation between wages and producing power. No 
other basis can stand for a moment in the actual work of industry. 
Men go into business to gain profit ; if, in their opinion, the employee 
is not worth $8.00 a week, she will not be retained, no matter what it 
costs to live. If she is worth to the business $18.00, that will be the 
wage. No law can force anyone to remain in a business that does 
not pay. 

The theory of a minimum wage based on the cost of living is 
flatly inconsistent with the facts of daily life and preparation for any 
occupation. At what age or point is a beginner, or apprentice, to 
receive the full legal wage ? Is no boy, or apprentice, to be allowed 
to receive a partial reward till he is a full-fledged adult workman? 
How about the woman, who, in the economic role of domestic labor, 
knits stockings in odd hours in order to add a little to the family 
income — shall she receive nothing if not the full legal wage? Shall 
the boy, or even a young lawyer just entering an office, be forbidden 
to receive the small stipend of the preparatory period ? 

Suppose it were required by law to pay shop-girls $8.00 a week 
instead of $5.00 on the ground that the insufficient $5.00 leads to 
vice ; then, since no ordinary business would pay $8.00 unless it were 
earned, those who did not earn $8.00 would inevitably be dropped 
from employment without even the help of $5.00 to save them. If 
$5.00 is no protection from vice, how much less is no wages at all? 
This proposal of a minimum wage is directly opposed in practice to 
the very self-interest of the girls themselves. 

It is crass to try to remedy wages which are admittedly too low 
by fixing a legal minimum wage, which can never be enforced unless 
private business establishments are to be regarded as state institu- 
tions. In a state factory, wages may possibly be determined by law, 
but not in open competitive business conditions, where the supply 
of labor has as much influence on wages as the demand. If the 
supply of women wage-earners converges on only certain kinds of 
work, wages will be lowered by the very large supply of the workers. 



566 CURRENT ECONOMIC PROBLEMS 

There is no exit by this door of legal enactment as to the amount of 
wages. 

The true and immediate remedy is the creation of ready means 
by which the industrial capacity of the wage-earning women will be 
increased. The wrong situation — of which low wages, possible 
starvation, and the temptation to vice are only symptoms — is due 
primarily to the fact that women thrown on their own resources 
know no trade and crowd each other in the market for unskilled 
labor. The remedy lies in the creation of places of instruction where 
any woman (no matter how poor) shall be taught a trade and have 
skill given her by which she can obtain a living wage. 

The remedy lies in preventing a congestion of unskilled feminine 
labor by industrial education. There is no other rational or per- 
manent or human way out of the present wretched situation, if we 
have the real interest of the workers at heart — and are not interested 
chiefly in getting some cheap political notoriety. 

This conclusion appHes to men as well as to women. Is not a 
skilled carpenter worth more than a blunderer? In any business, 
does not every one agree that it is fair to give a very energetic, live, 
active, skillful salesman more than a stupid? If he is skilled he 
earns more, because he brings in more business. That being settled 
we do not fix his wages on what it costs him to five. He has a right 
to spend his income as he pleases. Hence, if we were to adopt the 
theory of the minimum wage we should be adopting a new theory 
of wages, which would justify the refusal to pay higher wages based 
on efficiency. 

The only real permanent aid to low wages is to increase the pro- 
ductivity and skill of the persons at the bottom. Instead of talking 
of such injurious palHatives as minimum wages, create institutions 
at once where those persons can be given a trade or training for a 
gainful occupation. The cry for a minimum wage is evidence of the 
industrial incapacity, the lack of producing power, in masses of our 
people. The concrete ways of increasing the productive power of 
each man and woman are not unknown. Moreover, the captain of 
industry can introduce carefully worked-out plans for helping his 
operatives to rise in life ; tO' better conditions by welfare work ; to 
encourage savings and thrift; to introduce the stimulus of profit 
sharing; and above all, establish civil-service methods devised to 
pick out and promote the promising youth so that the path from the 
bottom to the top is open to every employee. Under unrestricted 
competition, there will be seen the inevitable results of 'natural 
monopoly' by which superiority comes to its own, and wages are in 
some proportion to productive power. 



ECONOMIC INSECURITY 567 

279. Wage-Settlement by External Authority'^ 

BY S. J. CHAPMAN 

The fundamental objection to the settlement of wages by external 
authority is easily formulated. New needs are constantly arising; 
and it is partly by the spontaneous emergence of new needs, changes 
in the proportions of needs, and the satisfaction of new demands, 
that society progresses. It will not be inferred from this statement, 
of course, that caprice and vacillation in demand are good. It is 
to the immediate gain of the community that production should 
react speedily upon the fresh calls made upon it, since thereby the 
most satisfaction is elicited from a given quantity of producing 
power. Further, it is to the ultimate advantage of the community 
that this rapid response of society on its productive side to society on 
its consumptive side should be forthcoming, since thereby imagina- 
tion is quickened and the way is laid open for further progress. By 
the satisfaction of old wants scope is given for the expression of 
new wants. Progress does not mean merely change of wants, apart 
from the character of the change, but change is so essential as to be 
a presupposition of progress. The general disappointment of aspira- 
tions saps social vitality. Again, a great economy results from inter- 
national specialism following the divisions marked out by national 
differential advantages for the production of certain goods. These 
relative advantages are variable, and therefore the industries of a 
country with much foreign trade will wax and wane relatively if the 
results are to be procured from its productive power. 

Now rapid alterations in the industrial field, in response to the 
varying circumstances that we have outlined, can be secured only if 
public demand is transferred direct to capital and labour through the 
medium of the employers' demand for them. If it is, the industry 
that should contract naturally contracts because it offers small profits 
and wages below the normal level, while the business that should 
expand naturally expands on account of its exceptional remuner- 
ativeness to all factors which engage in it. Once unlink the existing 
close connections between public demand and wages, and a large 
proportion of the nation's productive power will be regularly mis- 
applied, unless or until settlement at comparative stagnation is 
induced. Moreover, the best will not be made of the aptitudes and 
tastes of the individuals of whom society is composed. No arbitrator 
can in the nature of things possess sufficient knowledge of the 
demand for, and supply prices of, labour to enable him to declare the 
relative wages that are best in the long run for the community as a 

^Adapted from Work and Wages, II, 260-264. Copyright by Longmans, 
Green & Co. (1904). 



568 CURRENT ECONOMIC PROBLEMS 

whole. The chances are that in many of the awards serious mistakes 
will be made; after some time, it is true, the awards are revised, but 
it is then too late for all the damage inflicted to be repaired, and there 
is again no surety that the errors will be corrected. This is no plea 
for stringent laisses faire; State intervention in the interests of life 
and healfh, and combinations to render more effective the bargaining 
power of labour and the demand of labour for pleasant conditions, 
are quite different in principle from the surrender to courts, which 
can never have before them the data to enable them to do the right 
thing in the settlement of relative remunerations as between the 
numerous classes of labour and other factors in production. To 
use an analogy, the problem is to deduce from a person's constitu- 
tion how much food he should take each week for the next six 
months. Who shall say? For who shall deduce from the parts of 
the organism their joint needs now and for the next few months? 
Fortunately, nature solves the riddle by giving to such organisms 
appetite. In the social organism the analogous regulator is to be 
found in individual demands. 

There are two further dangers. The one is that, though some 
State action may give scope to individual initiative — by which we 
advance — another kind of State action may weaken it. The other 
danger arises from the fact that distribution is so linked to produc- 
tion that complexity in the one necessitates complexity in the other. 
If society is incapable of assuming a more intricate system of dis- 
tribution, further complication for the improved economic working 
of the productive system is retarded. Industrialism is relatively 
simple in form and limited in extent in the Australasian Colonies. 
Agriculture is the chief occupation, and this being untouched by the 
arbitration laws is a vent for any labour or capital driven out of the 
industries. Hence the settlement of wages by boards with power 
may not very seriously diminish prosperity. But it would in a 
country with more involved productive arrangements, where the 
loophole of escape from onerous decisions was less adequate. Pro- 
gress would be impeded until the artificial system was repudiated, 
and the old lesson that had been forgotten of the self-settlement of 
wages under simple conditions had been learned afresh. 

Besides, lastly, there is the unwholesomely close association be- 
tween politics and self-interest. What would be the state of democ- 
racy in the next generation if wage-earners regarded the govern- 
ment as one of the chief arbiters of wages, as they might easily do 
when, according to their experiences, wages had been settled, as a 
rule at least, if not invariably, in a Court, State instituted and State 
supported, the awards of which were enforced by the State? 



ECONOMIC INSECURITY 569 

280. A Minimum Wage for Immigrants^" 

BY PAUL U. kE;i,I,OGG 

My plea is to draft into our immigration law the provision that 
no immigrant who arrives here after a specified date shall be per- 
mitted to hire out to a corporate employer at less than a living wage, 
say $2.50 or $3.00 a day — until five years are elapsed, and he has 
become a naturalized citizen. When he is a voter, he can sell his 
American workright for a song if he must and will, but until then he 
shall not barter it away for less than the minimum cash prize, which 
shall be determined as a subsistence basis for American family live- 
lihood. 

It would be neither the intent nor the result of such legislation 
to pay newcoming foreigners $3.00 a day. No corporation would 
hire Angelo Lucca and Alexis Spivak at $3.00 as long as they could 
get John Smith and Michael Murphy and Karl Schneider for less. 
It would be the intent and result of such legislation to exclude Lucca 
and Spivak and other "greeners" from our congregate industries, 
which beckon to them now. It would leave village and farm and 
country open to them as now. And meanwhile, as the available 
labor supply fell off in our factory centers, the wages paid 
Smith, Murphy, Schneider, and the rest of our unskilled labor 
would creep up toward the federal minimum. 

First a word as to the constitutionality of such a plan. It would 
be an interference with freedom of contract ; but the contract would 
lie between an alien and a corporation ; between a non-citizen and a 
creature of the state. I have the advice of constitutional lawyers 
that so far as the alien workman goes the plan would hold as an 
extension of our laws regulating immigration. On the other hand, 
the corporation-tax laws afford a precedent from setting oft the cor- 
porate employer and regulating his dealings. 

For three special reasons my belief is that the general enforce- 
ment of such a law would be comparatively simple. Sworn state- 
ments as to wage payments could be added to the data now required 
from corporations under the federal tax law. This would be an 
end desirable in itself. In the second place every resident worker 
would report every violation that affected his self-interest or threat- 
ened his job. For my third reason I would turn to no less a counsel 
than Mark Twain's Pudd'n Head Wilson. With , employment re- 
port cards half a dozen clerks in a central office in Washington 

^^ Adapted from "Immigration and the Minimum Wage," in the Annals 
of the American Academy of Political and Social Science, XLVIII, 7S-77- 
Copyright (1913). 



570 CURRENT ECONOMIC PROBLEMS 

could keep tab on the whole situation by means of finger prints. 
Finger prints could be taken of each immigrant on entry ; they could 
be dupHcated at any mill gate or mine entry by the employer, filed 
and compared rapidly at the Washington bureau. 

As compared with joint minimum wage boards affecting men 
and women alike, as do those of Australia and England, the plan 
would have the advantage of not being democratic. The workers 
themselves would not take part in its administration. And the plan 
would have the signal advantage of being national, so that progres- 
sive commonwealths need not penalize their manufacturers in com- 
peting with laggard states. 

As compared with the literacy test, the plan would not shut 
America off as a haven of refuge and would not, while it was under 
discussion, range the racial societies and the internationalists along- 
side the steamship companies and the exploiters of immigrant labor. 
And it would have an even more profound influence on the condi- 
tion of life and labor. 

What are the positive benefits to be expected from such a pro- 
gram ? 

1. It would gradually, but irresistibly, cut down the common 
labor supply in our industrial centers. 

2. Once the unlimited supply of green labor was lessened in 
these industrial centers, a more normal equilibrium would be struck 
between common labor and the wages of common labor. Now it is 
like selling potatoes when everybody's bin is full. 

3. It would tend to stave off further congestion in the centers 
of industrial employment and give us a breathing spell to conquer 
our housing problems and seat our school children. 

4. It would shunt increasing numbers of immigrants to the 
rural districts and stimulate patriotic societies to settle their fellow 
countrymen on the land. 

5. It would tend to cut down the accident rate in industries 
where "greeners" endanger the lives of their fellows. 

6. It would cut down the crowd of men waiting for jobs at mill 
gates and street corners, correspondingly spread out rush and sea- 
sonal work, and help along toward the time when a man's vocation 
might mean a year-long income for him. 

7. It would give resident labor in the cities a chance to organize 
at the lower levels and develop the discipline of self-government. 

8. It would put a new and constructive pressure on employers 
to cut down by invention the bulk of unskilled occupations, the 
most wasteful and humanly destructive of all work. 



ECONOMIC INSECURITY 571 

9. It would bring about a fair living, a household wage, in such 
routine and semi-skilled occupations as remained. 

10. It would tend to change mining settlements and mill towns 
from sleeping and feeding quarters into communities. 

G. COMPULSORY ARBITRATION AND WAGES 
281. Arbitration in New Zealand^^ 

BY HUGH H. lyUSK 

The New Zealand Arbitration Law was the first attempt ever 
made on anything like a national scale tO' ensure something like jus- 
tice for the workers, while at the same time it grappled with the evil 
that had been an increasing one in every civilized country for half 
a century. It was recognized that every form of warfare — whether 
between nations, classes, or individuals, — was in its nature an ap- 
peal to force, and not to fair-play or justice. It was, in fact, an 
appeal to the higher intelligence, as well as to the common-sense, 
both of workers and employers ; and it said much for the innate 
common sense of the classes for whose benefit it was in the first 
place intended, that they were willing at least to give it a trial. 

The Arbitration Law of New Zealand begins with a full recog- 
nition of the principle of Trades Unionism, which it makes use of 
as the basis of the new law. It provides that any Union containing 
a certain number of members may avail itself of ^the benefits 
of the statute by registering the association as oue subject to the 
provisions of the law. The only compulsory feature of the statute 
is that as long as the association and its members remain registered 
they shall be subject to the provisions of the statute. 

These provisions are aimed directly at the prevention of indus- 
trial warfare by making it a punishable offence for any body of 
workers to- leave off work in concert, for the purpose of compelling 
the employers in any trade or employment to agree to a demand for 
higher wages, or any other alteration in the conditions of their em- 
ployment. On the other hand it is equally an offence for any asso- 
ciation of employers to discontinue the employment of their workers 
for the purpose of compelling their agreement to any change in 
their rates of payment, in their hours of work, or toi any other pro- 
posed change in the existing conditions of employment. Instead of 
a resort either to the strike ov the lock-out, the law provides that 
whenever a dispute arises in any trade in which either the workers 
or the employers are registered as an association under the pro- 
visions of the statute, either party may at once call in the assistance 

"^Adapted from Social Welfare in New Zealand, 74-88. Copyright by 
Sturgis & Walton (1913)- 



572 CURRENT ECONOMIC PROBLEMS 

of the local Board of Conciliation, whose duty it is to meet the 
representatives of the parties, and endeavour by all reasonable means 
to bring about an agreement on the matters in dispute. In case 
conciliation should prove ineffectual, however, it becomes the duty 
of the conciliator to refer the question to the Arbitration Court 
without delay. This court consists of five members in all, two of 
whom are chosen by the votes of the registered associations of the 
workers, and twO' by those of the registered associations of em- 
ployers, while the fifth member of the Court is one of the judges 
of the Supreme Court, who is also President of the Arbitration 
Court, and is from time to timie appointed by the Government to 
this particular office. The decisions of the Court are declared by 
the statute to be final, and subject tO' no appeal, except on the single 
ground that the question dealt with is beyond the powers given to 
the Court. 

The judgments of the Arbitration Court may be enforced either 
by fines, levied on the property of the Associations, or of individual 
members ; or by imprisonment of the officers, or of members of 
such associations as may be declared guilty of contempt of the 
Arbitration Court. 

The methods by which the New Zealand Arbitration Court has 
arrived at its conclusions are probably without precedent in the 
history of modern commercialism. Its first duty in all cases where 
the amount of wages was in dispute was to ascertain what it should 
cost the average worker, with a wife and family, to live in reasonable 
comfort and respectability. Its second duty was to determine how 
much the profits of the employers in an ordinary year would enable 
them to pay. The first question was one of national policy. The 
second question was one of fair-play and ordinary justice, as be- 
tween man and man ; and to form a fair and intelligent conclusion it 
was necessary to learn a good many things that had been regarded in 
the past as the business of the employers, and of nobody else. 

It may be said that the answer to the question of the amount 
of wages needed to secure a decent living for the workers and their 
fajnilies was, after all, a matter of opinion, and possibly even of 
prejudice. Fortunately there was in New Zealand, as, indeed, there 
is probably in every country a court of appeal on matters of opinion 
that may generally be trusted to take a view of such questions that 
is tolerably fair. The New Zealand statute has provided for such 
an appeal, by providing that the proceedings of the Arbitration 
Court should in all cases be conducted in public, so that the evidence 
given should be open to the press and known to the people. In dif- 
ferent communities, it is true the public opinion thus formed might 
differ considerably ; but in every country, it may be said with con- 
fidence, the opinion thus formed would exercise a powerful influ- 



ECONOMIC INSECURITY 573 

ence on a court of arbitration. What the Court had to do, therefore, 
was in the first place to decide on the lowest reasonable living- wage — 
and this was practically the same in every trade or employment. 
This lowest living- standard, as it did not depend on the profits of 
the business, was not affected by the question either of capital in- 
vested, or of the conditions of the trade. 

The question of the minimum wage, however, was only a part, 
and a small part, of the problem with which the Arbitration Court 
had to deal. While it was clear that nobody could be allowed to 
pay less than a living wage to those employed, the question of 
justice demanded a good deal more than this before it could be said 
to be fairly settled. The old idea that the man who found the money 
should have everything, and the man who found the labour as little 
as possible, had been abandoned in New Zealand ; the problem which 
the Court had to solve was the somewhat indefinite one — ^what was 
fair? To enable this to be done the law provided that the Court 
might call on the employers, in any dispute as to wages, to produce 
the books containing the accounts oi their business, and to show 
exactly what capital was invested in it, and what profits had been 
earned. The task of the Court was by no means an easy one. Even 
when the books of a business had been produced, and the capital 
invested, and the profits made had been ascertained, the question 
remained what ought the employers to give out of the profits to the 
workers, without whose assistance no profits could have been 
earned? What, as a matter of fact, the Arbitration Court of New 
Zealand has done during the sixteen years of its existence has been 
to come to some conclusion that seemed fair in each case. The 
principle of a real partnership has been acknowledged by the Court, 
but the shares due to the partners have been matters of opinion, and 
the awards of the Court have, as a consequence, always been open 
to criticism by one or other party to the dispute. 

There have been many such criticisms, both in the colony itself 
and elsewhere ; but as a rule the parties most nearly concerned have 
admitted that the decisions of the Court were conceived in a spirit 
of fair-play as between the parties. The law has now been in force 
during sixteen years, and it has been accepted by both employers 
and employed as the controlling force of the industrial life of 
nearly a million people of our own race. Amendments have from 
time to time been made in the law, as new features have appeared 
that seemed to call for regulation, but in all essentials the law that 
was conceived in a spirit of fair- play and justice^ — recognizing 
equally the rights of Labour, Capital, and of the people at large, 
sixteen years ago, remains in force today, and, like all the other 
laws of New Zealand, is enforced without fear or favour. 



574 CURRENT ECONOMIC PROBLEMS 

282. Compulsory Arbitration in Theory and Practice^^ 

BY JAMES EDWARD EE ROSSIGNOL AND WILLIAM DOWNIE STEWART 

There is a pretty well-defined theory in justification of compul- 
sory arbitration in the minds of those who favour that method of 
settling industrial disputes. The competitive system, in this view, 
has resulted in two great evils ; sweating and strikes. Under sweat- 
ing the workers receive less than enough to secure a decent subsist- 
ence for a human being, and the strike is a form of private war in 
which the strongest win, not those who have justice on their side, 
and which causes great inconvenience to the public, who are a third 
party in every strike. All this evil and injustice should be done 
away with by an appeal to a court. 

On the surface the theory appears to be highly reasonable, but 
when put into practice serious, if not fatal, difficulties arise. One of 
these has to do with the discovery of specific principles of justice; 
the other with the enforcement of awards supposedly just. 

The theory of fair wages that appears to prevail is the doctrine 
of the living wage, stated both in its negative and its positive form. 
Stated negatively, the theory holds that extremely low wages, such 
as are found under the sweating system, are not fair wages, be- 
cause insufficient to afToird a decent living according tO' the colonial 
standard. Stated positively, a fair wage is a wage which is suf- 
ficient to give the worker a decent living according to the colonial 
standard. 

Other difficulties arise when the theories are applied to actual 
cases. For example, a wage which would be quite sufficient for a 
single man might be inadequate for a married man, and should vary 
with the size of his family and their ability to contribute to their 
own support. Again, a living wage for a skilled worker must be 
higher than that for a common labourer, since his standard of liv- 
ing is higher. This arises from the fact that skilled labourers are 
scarce, but this introduces another complicating factor, the supply 
of labour, which, in densely populated countries, threatens to de- 
stroy, not only the theory, but the possibility of a living wage. 

These and other complications prevent the creation of a body 
of legal principles defining and explaining the nature of fair or 
reasonable wages, but do not prevent the Court from bearing in 
mind the desirability of keeping the customary standards of colonial 

^^Adapted from State Socialism in New Zealand, 238-247. Copyright by 
Thomas Y. Crowell & Co. (1910). 



ECONOMIC INSECURITY 575 

life from falling, and the equal or greater desirability of raising 
those standards as much as possible. The doctrine of a living 
wage, then, is not an established legal principle, but an ideal toward 
which people may strive. 

In practice, the awards appear to be based on two main prin- 
ciples; first the desire and intention of the Court to secure a living 
wage to all able-bodied workers ; second, the desire of the Court to 
make a workable award, that is, to grant as much as possible to the 
workers without giving them more than the industry can stand. 
In doing this regard must be had to the prosperity of a given in- 
dustry as a whole, if not to the profits of individual employers. It 
is usually taken for granted that no reduction will be made in the 
customary wages in any industry, and, in times of depression, this 
might be regarded as a third regulative principle. Again, it is 
the custom of the unions, in formulating their disputes, to demand 
more than they expect to get, knowing that, in the worst case, they 
will lose nothing. So frequently has this been done that one might 
almost lay down a fourth regulative principle, the principle of split- 
ting the difference. 

The rigidity of system which is characteristic of the railway 
rates seems to be taking possession of the regulation of wages also. 
When the awards were f ew^ in number, it was easy to make a change 
without any serious disturbance to industry; but now that they are 
numerous and their scope has been widely extended, it is difficult 
to make a change in one without making many other changes, for 
the sake of adjusting conditions of labour to the changing con- 
ditions of business. 

Another stumbling-block in the way of advance in wages is the 
inefficient or marginal or no-profit employer, who, hanging on the 
ragged edge of ruin, opposes the raising Oif wages on the ground 
that the slightest concession would plunge him into bankruptcy. His 
protests have their effect on the Arbitration Court, which tries to 
do justice to all the parties and fears to make any change for fear 
of hurting somebody. But the organized workers, caring nothing 
for the interests of any particular employer, demand improved con- 
ditions of labour, even though the inefficient employer be elimi- 
nated and all production be carried on by a few capable employers 
doing business on a large scale and able to pay the highest wages. 
This is not to say that even the most efficient employers could 
afford to pay wages much in excess of those now prevailing. 

From such a statement as this it is but a step tO' the position that 
wages are determined chiefly by economic laws, and that the Arbi- 
tration Court can cause, at most, very slight deviations from the 
valuations of the market. 



576 CURRENT ECONOMIC PROBLEMS 

It is not easy to show that compulsory arbitration has greatly 
benefited the workers oi the Do'minion. Sweating has been abol- 
ished, but it is a question whether it would not have disappeared 
in the years of prosperity without the help of the Arbitration Court. 
Strikes have been prevented, but New Zealand never suffered much 
from strikes, and it is possible that the workers might have gained 
as much, or more, by dealing directly with their employers as by 
the mediation of the Court. 

It is a common opinion in New Zealand that the increase in the 
cost of living has been due largely to the high wages and favourable 
conditions of labour fixed by the Arbitration Court, but so wide- 
spread a result cannot have been due chiefly to local causes. 

Manufacturers complain that the awards have been so favour- 
able to the workers as to make it difficult to compete with British 
and foreign manufacturers, and demand that either the arbitra- 
tion system be abolished or that they be given increased protection 
by increased duties on imported goods. It is claimed that the growth 
of manufactures has not kept pace with the growth oi populatioii 
and the importation oi manufactures from abroad. 

There is such agreement among manufacturers as to the effect 
of compulsory arbitration in increasing the cost of production that 
their statements cannot be lightly dismissed, especially as many un- 
biased writers concur in the opinion. 

Unquestionably, manufacturers, with the exception of the great 
industries which work up raw materials for market, are not doing 
any too well, but it is not likely that compulsory arbitration is the 
chief cause of this. The high wages which manufacturers have to 
pay are due chiefly to industrial conditions which always prevail 
in a new, thinly populated country with great natural resources 
awaiting development. 



XI 
THE PROBLEMS OF TRADE UNIONISM 

You have doubtless heard the statement, "In America there is no class- 
conscious proletariat ; for the American laborer sees in himself a capitalist 
in embryo." When our country possessed an open frontier, undeveloped 
natural resources, opportunities for the ready acquisition of property, and 
a rising standard of living, a vigorous protest against conventional social 
arrangements was not to be expected. But with the passing of the frontier, 
the restriction of opportunity, and the increasing tendency toward social 
stratification, sentiments are changing. As laborers are convinced in increas- 
ing numbers that they are permanently of the "proletariat," they express 
themselves more vigorously against a "system" that makes inequalities possi- 
ble. This, however, hardly threatens a "class-conflict" in the immediate 
future ; our class and group lines run in too many directions and cut each 
other at too many angles for that. 

The "social unrest" is much more closely associated with group than 
with class interests. There are many groups of large capitalists and of 
skilled laborers. There exist accordingly many types of "capitalism" and 
even more of "unionism." Small capitalists and unskilled laborers alike are 
without consciously developed group feelings and vehicles for the expression 
of these feelings. It is those who are best off, those who appeal least to 
our sympathies, whose strength lies in union. However, since these labor 
groups are everywhere in contact with much the same type of "capitalist 
groups," they have much the same prejudices, sentiments, and theories. 
Fighting as they are, -each for self, they are creating a common body of labor 
theory, and their respective interests are impelling them to a certain amount 
of common activity. The like is true of the capitalists. 

A study of the appraisals placed upon unionism by men whose relations 
to it are very different, such as those of an employer, a unionist, and a 
college president given below, show fundamental differences as to the value 
of such an institution. Perhaps nothing connected with "the labor movement" 
is harder to understand — or more necessary to an appreciation of the problems 
of trade unionism — than the theories and attitudes — the viewpoints if you 
will — of capitalists and laborers. They are as conflicting and contradictory 
to an outsider as they are obvious and axiomatic to those who hold them. 
The capitalist, concerned with the "business" side of industry, easily acquires 
an understanding of the importance of basic institutions. He accordingly 
thinks in terms of legality, assumes the schemes of values surrounding him 
to be absolute, surrounds "property," "contract," and their complements 
with an air of sanctity, regards "the constitution" as supreme, and puts his 
full trust in the integrity of the courts. In determining the relations of 
employer and employees, he relies upon the efficacy of free competition and 
individual bargaining, insists upon his right to prescribe the conditions of 
employment, and believes quite firmly that identical legal rights guarantee 
equality of treatment to the two parties. 

The laborer, concerned with the technical side of the process, acquires 
a common-sense philosophy of force; he believes in fatalism; he thinks that 
the employer has a more strategic position in bargaining than he possesses ; 
he is convinced that capital concentrated under corporate ownership can be 
fought only by "united" labor. Unity in the labor group, accordingly, is 
the one thing that is necessary to an improvement in conditions. To secure 
it he thinks it necessary to insist uncompromisingly upon the "principle of 

577 



578 CURRENT ECONOMIC PROBLEMS 

uniformity"; upon a control of apprenticeship, of hiring and discharge, of 
technique, of materials — in short of all that is necessary to secure in the 
larger sense the absolutely necessary "closed shop" ; and particularly upon 
collective bargaining. This attitude serves to make quite intelligible such 
peculiar phenomena as restriction of output, taboos upon non-union materials, 
and the intense hatred of "scabs." 

The antithesis between the two systems finds a clear expression in 
"scientific management." The employers, who are responsible for the many 
innovations which masquerade under this catholic name, aim at giving to 
management the control of technique, the selection of men properly qualified 
for various productive tasks, the establishment of a close connection between 
the individual's work and his pay, and inferentially they aim at individual 
bargaining. The laborers oppose it because it strips them of the control of 
technique, of the right to hire and discharge laborers, of the prescription of 
the conditions of employment — of that "uniformity" which is essential to 
collective activity. 

Industrial conflict, which is the most spectacular side of the trade-union 
movement, is to be explained very largely in terms of "collective bargaining." 
The opposing parties make use of quite similar weapons : the strike, for 
example, finds its counterpart in the lockout, and the boycott in the blacklist. 
Each of these, curiously enough, resolves itself into the collective exercise 
of a right which in the individual case is legally recognized. It is not sur- 
prising that law, lacking an adequate social philosophy, and accustomed to 
discover society by aggregating individuals, should have been put to some 
sore shifts in dealing with these collective weapons. The use of these is 
usually part of a protracted campaign prosecuted for many years, using a 
varied strategy, and employing many different instruments. 

In the last ten years the strategic position of the employers has been 
greatly strengthened, that of the laborers correspondingly weakened. This 
is partly due to the greater staying power of capital. In part it is due to 
the close correspondence between the interests of thg employers and the 
natural development of an individualistic social system. This is evident in 
the undermining of the powers of unionism by a long succession of court 
decisions. But to a considerable extent it is due to the effectiveness of 
employers' associations. Because of their smaller numbers, employers better 
than laborers can make use of devices which lack full legal approval. The 
blacklist, for instance, can be effectively used where its very publicity pro- 
hibits the use of the boycott. Likewise, through "spies," employers can get 
advance information of the strategy of an anticipated industrial conflict. 
It is beyond the power of unions to get any such information. The associa- 
tion has, through careful study, reduced strike-breaking almost to an exact 
science. The employers have liberally used funds to "educate" the public 
to the evils of those practices of the unions which are most inimical to them. 
Immigration, too, has stood them in good stead. 

This weakening in the strategic position of labor is producing some 
very important modifications in our social institutions. It is forcing "labor 
into politics." The "exemption clauses" of the Clayton act are but earnests 
of what we may eventually expect. Organized labor at the polls is far 
stronger than organized capital. If its theory is forced into our institu- 
tional system, our whole social life will be profoundly affected. Another 
form in which it is seeking expression is through such subtle and harassing 
methods as "the intermittent strike" and sabotage. These devices of "revo- 
lutionary unionism" are making their way into some very well-established 
unions. It need not be said that back of these methods is an attitude which 
insists upon the welfare of the small group even at the expense of society 
as a whole. 

Our study of its more conspicuous features must not allow us to over- 
look the importance of unionism as an agency of social control. The infor- 
mation, theories, and prejudices which the laborers acquire from their unions 



TRADE UNIONISM 579 

influence profoundly their thought and action upon non-industrial as well as 
upon industrial matters. The unions can eliminate from the lives of their 
members much of economic insecurity, can do much to establish better work- 
ing conditions, and can set models for the state to use in improving the con- 
ditions of unorganized labor. It is more than possible that eventually they 
can, through the trade agreement, create permanent positions and equities in 
property for labor, and that these will, under the guise of having been 
established under free contract, be recognized by the law. Our gravest con- 
cern is lest, in seeking the interest of the group, the interests of society be 
completely lost sight of. 

A. GROUP AND CLASS CONSCIOUSNESS 
283. Bourgeoisie and Proletariat^ 

BY WERNER SOMBART 

Capitalism is based on the private ownership of all commodities, 
and therefore also of those which are required for production — raw 
material, machinery, factories, land. Historic development has 
brought it about that production in these days is on a large scale; 
that is to say, it is carried on by the combination of many laborers 
under uniform direction. Thus, a thousand men are united to work 
a mine or a machine factory, and hundreds to spin or weave in 
some big establishment. But the same development has also brought 
it about that those who work together in this way have not the same 
rights with regard to the means of production. Some own these 
means of production, and therefore become the directing factors in 
the work of production, and also owners of the commodities pro- 
duced. The others, who form the great mass of the workers, are 
shut out of possession of the means of production. Hence it fol- 
lows that, in order to live, they are forced to put their labor power 
at the disposal of those who do possess the means of production, in 
return for a money payment. This comes about by way of a wage 
contract, wherein the laborer, who possesses naught but his labor, 
agrees with the owner of the means of production, who is on that 
account the director of production, to undertake to render a certain 
amount of work in return for a certain amount of pay. 

When we remember that all production depends on the com- 
bination of labor and the material means of production, then the 
capitalist system of production differs in the first instance from 
other systems in that the two factors of production are represented 
by two separate groups, which must meet and combine if a useful 
product is to ensue. In this the capitalist system differs, from, let 

^Adapted from Socialism and the Social Movement 3-8. Published by 
E. P. Button & Co. (1908). 



58o CURRENT ECONOMIC PROBLEMS 

us say, the craft organization of industry, where the laborers were 
at the same time the owners of the means of production. But it dif- 
fers likewise from slavery in that in the capitalist system the com- 
bination of the two groups comes about by free contract in what is 
known as the wages contract. 

The capitalist organization of society is characterized by the 
race for profit and by a peculiar form of mental activity in individ- 
uals which I call "economic rationalism." All economic activities 
are at bottom directed towards the increase of the money which is 
put into production, or, in technical language, towards the profitable 
investment of capital. To this end, all the thoughts of the capital- 
ists or owners of the means of production, or of agents paid by 
them, are occupied day and night in an almost feverish restlessness 
in order to bring about the most practical and rational shaping of 
economic and technical processes. 

The social class which stands for the interests of the capitalist 
system is the bourgeoisie, or middle class. It is made up, in the 
first place, of capitalist undertakers, and in the second, of a large 
number of people whose interests are similar to those of the capital- 
ist undertakers. I am thinking of the following elements: (i) 
All those who are economically independent (or who would like to 
be so), and are intent on profit-making, and who, moreover, desire 
a free legal system favorable to profit-making. That would include 
many shopkeepers, property-owners, agents, stock-jobbers, and so 
on, and also the more modern of peasant proprietors. (2) All 
those who are not economically independent, but are associated with 
the capitalist undertaker in his activities, mostly as his representa- 
tives, and who, as a rule, participate in his economic success. That 
would include paid directors of companies, managers, foremen in 
large businesses, and people like them. 

The class at the opposite pole to this — the one cannot be thought 
of without the other — I have called the proletariat. In order to get 
a true conception of this class, we must free ourselves from the pic- 
ture of a ragged crowd which the term brought to mind before we 
read Karl Marx. The term "proletariat" is now used in a technical 
sense to describe that portion of the population which is in the serv- 
ice of capitalist undertakers in return for wages, and elements akin 
to them. 

The free wage-earners form the bulk of this class — all such per- 
sons as are employed in capitalist undertakings, leaving out, of 
course, those mentioned above as belonging to the bourgeoisie be- 
cause their interests are bound up with the capitalist system. 



TRADE UNIONISM 581 

I have already pointed out that in order to get a true concep- 
tion of the proletariat we must give up the idea of a ragged crowd. 
Indeed, the life of the proletarian is not always intolerable. Abso- 
lute distress is in no way a special characteristic of the class, though, 
to be sure, there are within it innumerable instances of want. But 
few proletarians are as badly off as the Russian peasant, or the 
Chinese coolie, or the Irish tenant, none of whom belong to the 
proletariat. Many a wage-earner, even in Europe, earns more than 
a university teacher, and in America the average income of this 
class falls not much below the maximum salary of an extraordinary 
professor in Prussia. 

284. The Historical Basis of Trade Unionism^ 

BY SIDNE;y and BEATRICE WEBB 

The Trade Union arose, not from any particular institution, 
but from every opportunity for the meeting together of wage- 
earners of the same trade. Adam Smith remarked that "people of 
the same trade seldom meet together, even for merriment and di- 
version, but the conversation ends in a conspiracy against the pub- 
lic, or in some contrivance to raise prices." And there is actual 
evidence of the rise of one of the oldest Trade Unions out of a 
gathering of the journeymen "to take a .social pint of porter to- 
gether." More often it is a tumultuous strike out of which grows 
a permanent organization. Instances are o^n record in which a 
number of laborers who' have become accustomed tO' visit public 
houses have become the nucleus of organization. More than once 
the journeymen in a particular trade declared that, "It has been an 
ancient custom in the kingdom of Great Britain for divers Artists 
to meet together and unite themselves into- societies to promote 
Amity and true Christian Charity," and established a sick and 
funeral club, which invariably has proceeded to discuss the rate 
of wages, and insensibly has passed intO' a trade union with friendly 
benefits. And if the trade is one in which the members travel the 
result has been a National Trade Union. 

But this does not explain why the continuous organizations of 
wage-workers came as late as the eighteenth century? The essen- 
tial cause of this was the revolution in industry which came at 
this time. When such unions arose, the great mass of the work- 
ers had ceased tO' be independent producers, and had passed into 
the condition of life-long wage-earners. Such unions came after 
"the definite separation between the functions of the capitalist and 

^Adapted from The History of Trade Unionism, 21-37. Published by 
Longmans, Green. & Co. (1894). 



582 CURRENT ECONOMIC PROBLEMS 

the workman, or between the direction of industrial operations and 
their execution in detail." 

It is often assumed that the divorce of the manual worker from 
the ownership of his tools resulted from the introduction of ma- 
chinery and the factory system. Were this true, we should not find 
Trade Unions earlier than factories. Yet such combinations in 
England preceded the factory system by half a century, and oc- 
curred in trades carried on exclusively by hand labor. Some crafts 
lent themselves to an advantageous division of labor. Among these 
there is particularly to be mentioned that of tailoring. Because of 
the special skill required for tailoring for rich customers, the most 
proficient tailors were separated from the rest of the journeymen, 
and became practically a separate social class. This differentiation 
was promoted by the increasing need of capital for successfully 
beginning business in the better quarters of the metropolis. By 
1700 we find the typical journeyman tailor in London a lifelong 
wage-worker. It is not surprising, therefore, that one of the earl- 
iest instances of permanent Trade Unionism occurred in that trade. 
Another instance is that of the woolen workers in the West of 
England. Again, it is not peculiar that in the year 1790 the Shef- 
field employers found themselves obliged to take concerted action 
against the "scissors-grinders and other workmen who have en- 
tered into unlawful combinations to raise the price of labor." But 
the cardinal examples of the connection of Trade Unionism with 
the divorce of the worker from the instruments of production is 
seen in the rapid rise of trade combinations on the introduction of 
the factory system. 

It is easy to understand how the massing together in factories 
of regiments of men, all engaged in the same trade, facilitated and 
promoted the formation of workmen's societies. But the rise of 
permanent trade combinations is toi be ascribed tO' the definite separ- 
ation between the functions of the capitalist entrepreneur and the 
manual worker. It has becomie a commonplace of Trade Unionism 
that only in those industries in which the worker has ceased to be 
concerned in the profits of buying and selling can effective and 
stable trade organizations be maintained. 

285. The Organization of the Ill-paid Classes^ 

BY CHARLES H. COOLKY 

It is quite apparent that an organized and intelligent class-con- 
sciousness in the hand-working people is one of the primary needs 

'Adapted from Social Organisation, 284-289. Copyright by Charles 
Scribner's Sons (1909). 



TRADE UNIONISM 583 

of a democratic society. In so far as this part of the people is 
lacking in a knowledge of its situation and in the practice ol or- 
derly self-assertion, a real freedom will also be lacking, and we 
shall have some kind of subjection in its place; freedom being im- 
possible without group organization. That industrial classes exist 
cannot be well denied, and existing they ought to be conscious and 
self-directing. 

The most obvious need of class-consciousness is for self-asser- 
tion against the pressure of other classes, and this is both most 
necessary and most difficult with those who lack wealth and the 
command over organized forces which it implies. In a free society, 
especially, the Lord helps those who help themselves ; and those 
who are weak in money must be strong in union, and must also 
exert themselves to make good any deficiency in leadership that 
comes from ability deserting to more favored classes. 

That the dominant power of wealth has an oppressive action, 
for the most part involuntary, upon the people below, will hardly 
be denied by any competent student. The industrial progress of 
our time is accompanied by sufferings that are involved with the 
progress. These sufferings fall mostly upon the poorer classes, 
while the rich get a larger share of the increased product which 
the progress brings. 

Labor unions have arisen out of the urgent need of self-defence, 
not so much against deliberate aggression as against brutal con- 
fusion and neglect. The industrial population has been tossed 
about on the swirl of economic change like so much sawdust on a 
river, sometimes prosperous, sometimes miserable, never secure, 
and living largely under degrading, inhuman conditions. Against 
this state of things the higher class of artisans have made a partly 
successful struggle through co-operation in associations, which, 
however, include much less than half of those who might be ex- 
pected to take advantage of them. That they are an effective 
means of class self-assertion is evident from the antagonism they 
have aroused. 

Besides their primary function of group-bargaining, unions are 
performing a variety of services hardly less important to their mem- 
bers and to society. In the way of influencing legislation they have 
probably done more than all other agencies together to combat 
child-labor, excessive hours, and other inhuman and degrading 
kinds of work, also to provide for safeguards against accident, for 
proper sanitation, for factories and the like. In this field their 
work is as much defensive as aggressive, since employing interests, 
on the other side, are constantly influencing legislation and admin- 
istration to their own advantage. 



584 CURRENT ECONOMIC PROBLEMS 

Their functions as spheres of fellowship and self-development 
is equally vital and less understood. To have a we-feeling, to live 
shoulder to shoulder with one's fellows, is the only human life; 
we all need it to keep us from selfishness, sensuality, and despair, 
and the hand-worker needs it even more than the rest oi us. Usu- 
ally without pecuniary resources and insecure of his job and his 
home, he is, in isolation, miserably weak and in a way to be cowed. 
The union makes him a part of a whole, one of a fellowship. More- 
over, the life of labor unions and other class associations, throug'h 
the training which it gives in democratic organizations and dis- 
cipline, is perhaps the chief guarantee of the healthy political devel- 
opment of the handworking class. That their members get this 
training will be evident to anyone who studies their working, and 
it is not apparent that they would get it in any other way. 

In general no^ sort of persons mean better than hand-labo'ring 
men. They are simple, honest people, as a rule, with that bent to- 
word integrity which is fostered by working in wood and iron and 
often lost in the subtleties of business. Moreover, their experience 
is such as to develop a sense of the brotherhood of man and a 
desire to realize it in institutions. Not having enjoyed the artificial 
support of accumulated property, they have the more reason to 
know the dependence of each on his fellows. Occasionally out- 
breaks of violence a.larm us and call for prompt enforcement of 
law, but are not a serious menace to society, because general senti- 
ment and all established interests are against them ; while the subtle, 
respectable, systematic corruption by the rich and powerful threat- 
ens the ver}^ being of democracy. 

The most deplorable fact about labor unions is that they em- 
brace so small a proportion O'f those who- need their benefits. How 
far into the shifting masses of unskilled labor effective organization 
can extend only time will show. 

286. Types of Unionism* 

BY ROBERT -e. HOXIE 

A penetrating study of the union situation past and present seems 
to warrant the recognition of functional types quite distinct in their 
general characteristics. It is true that these functional types do not 
in practice represent exactly and exclusively the ideals and activities 
of any particular union organization or group. That is to say, no 

^Adapted from "Trade Unionism in the United States: General Char- 
acter and Types," in the Journal of Political Economy, XXII, 211-216 (1914). 



TRADE UNIONISM 585 

union organization functions strictly and consistently according to 
type. Yet as representing fairly distinct alternative programs of 
union action and as guides to the essential character and. significance 
of the diverse organizations and groups included in the heterogene- 
ous union complex, these functional types apparently do exist and 
are of the most vital concern to the student of unionism. There are 
seemingly four of these distinct types, two of which present dual 
variations. 

The first and perhaps most clearly recognizable functional type 
may be termed business unionism. Business unionism appears most 
characteristically in the programs of local and national craft and 
compound craft organizations. It is essentially trade-conscious 
rather than class-conscious. That is to say, it expresses the view- 
point and interests of the workers in a craft or industry rather than 
those of the working class as a whole. It aims chiefly at more here 
and now for the organized workers of the craft or industry, in terms 
mainly of higher wages, shorter hours, and better working condi- 
tions, regardless for the most part of the welfare of the workers 
outside the particular organic group, and regardless in general of 
political and social considerations except in so far as these bear 
directly upon its own economic ends. It is conservative in the sense 
that it professes belief in natural rights and accepts as inevitable, if 
not as just, the existing capitalistic organization and the wage sys- 
tem as well as existing property rights and the binding force of con- 
tract. It regards unionism mainly as a bargaining institution and 
seeks its ends chiefly through collective bargaining supported by 
such methods as experience from time to time indicates to be ef- 
fective in sustaining and increasing its bargaining power. Thus it 
is likely to be exclusive, that is, to limit its membership by means 
of the apprenticeship system and high initiation fees and dues, to 
the more skilled workers in the craft or industry or even to a por- 
tion of these. In method, business unionism is prevailingly tem- 
perate and economic. It favors voluntary arbitration, deprecates 
strikes, and avoids political action, but it will refuse arbitration and 
resort to strikes and politics when such action seems best calculated 
to support its bargaining efforts and increase its bargaining power. 
This type of unionism is perhaps best represented in the programs 
of the railway brotherhoods. 

The second union functional type seems best designated by the 
terms friendly or uplift unionism,. Uplift unionism, as its name in- 
dicates, is characteristically idealistic in its viewpoint. It may be 
trade-conscious or broadly class-conscious, and at times even claims 



586 CURRENT ECONOMIC PROBLEMS 

to think and act in the interest of society as a whole. Essentially 
it is conservative and law-abiding. It aspires chiefly to elevate the 
moral, intellectual, and social life of the worker, to improve the con- 
ditions under which he works, to raise his material standards of liv- 
ing, give him a sense of personal worth and dignity, secure for him 
the leisure for culture, and insure him and his family against the loss 
of a decent livelihood by reason of unemployment, accident, disease, 
or old age. In method, this type of unionism employs collective bar- 
gaining but stresses mutual insurance, and drifts easily into po- 
litical action and the advocacy of co-operative enterprises, profit- 
sharing, and other idealistic plans for social regeneration. The 
nearest approach in practice to uplift unionism is perhaps to be found 
in the program of the Knights of Labor. 

As a third distinct functional type, we have what most appropri- 
ately may be called revolutionary unionism. Revolutionary union- 
ism, as the term implies, is extremely radical both in viewpoint and 
in action. It is distinctly class-conscious rather than trade-con- 
scious. That is to say, it asserts the complete harmony of interests 
of all wage workers as against the representatives of the employing 
class and seeks to unite the former, skilled and unskilled together, 
into one homogeneous fighting organization. It repudiates, or tends 
to repudiate, the existing institutional order and especially individual 
ownership of productive means, and the wage system. It looks 
upon the prevailing codes of right and rights, moral and legal, as in 
general fabrications of the employing class designed to secure the 
subjection and to further the exploitation of the workers. In gov- 
ernment it aspires to be democratic, striving to make literal appli- 
cation of the phrase vox populi, vox Dei. 

Of this revolutionary type of unionism there are apparently two 
distinct varieties. The first finds its ultimate ideal in the socialistic 
state and its ultimate means in invoking class political action. For 
the present it does not entirely repudiate collective bargaining or 
the binding force of contract, but it regards these as temporary ex- 
pedients. It would not now amalgamate unionist and socialist or- 
ganizations, but would have them practically identical in member- 
ship and entirely harmonious in action. In short, it looks upon 
unionism and socialism as the two wings of the working-class move- 
ment. The second variety repudiates altogether socialism, political 
action, collective bargaining, and contract. Socialism is to it but 
another form of oppression, political action a practical delusion, col- 
lective bargaining and contract schemes of the oppressor for pre- 
venting the united and immediate action of the workers. It looks 



TRADE UNIONISM 587 

forward to a society based upon free industrial association, and 
finds its legitimate means in agitation rather than in methods which 
look to immediate betterment. Direct action and sabotage are its 
accredited weapons, and violence its habitual resort. These vari- 
eties of the revolutionary type may be termed respectively socialistic 
and quasi-anarchistic unionism. The former is perhaps most nearly 
represented in the United States by the Western Federation of 
Miners, the latter by the Industrial Workers of the World. 

Finally in the union complex it seems possible to distinguish a 
mode of action sufficiently definite in its character and genesis to 
warrant the designation predatory unionism. This type, if it be 
truly such, cannot be set apart on the basis of any ultimate social 
ideals or theory. It may be essentially conservative or radical, trade- 
conscious or class-conscious. It appears to aim solely at immediate 
ends, and its methods are wholly pragmatic. In short, its distin- 
guishing characteristic is the ruthless pursuit of the thing in hand 
by whatever means seem most appropriate at the time regardless 
of ethical and legal codes or the effect upon those outside its own 
membership. It may employ business, friendly, or revolutionary 
methods. Generally its operations are secret and apparently it 
sticks at nothing. 

Of this assumed union type also there appears to be two vari- 
eties. The first may be termed hold-up unionism. This variety is 
usually to be found in large industrial centers masquerading as busi- 
ness unionism. In outward appearance it is conservative ; it pro- 
fesses a belief in harmony of interests between employer and em- 
ployee ; it claims to respect the force of contract ; it operates openly 
through collective bargaining, and professes regard for law and 
order. In reality it has no abiding principles and no real concern 
for the rights or welfare of outsiders. Prevailingly it is exclusive 
and monopolistic. Generally it is boss-ridden and corrupt, the mem- 
bership for the most part being content to follow blindly the instruc- 
tions of the leaders so long as they "deliver the goods." Frequently 
it enters with the employers of the group into a double-sided mon- 
opoly intended to eliminate both capitalistic and labor competition 
and to squeeze the consuming public. With the favored employers 
it bargains not only for the sale of its labor but for the destruction 
of the business of rival employers and the exclusion of rival work- 
men from the craft or industry. On the whole its methods are a 
mixture of open bargaining coupled with secret bribery and violence. 
This variety of unionism has been exemplified most frequently 
among the building trades organizations under the leadership of men 
like the late notorious "Skinney" Madden. 



588 CURRENT ECONOMIC PROBLEMS 

The second variety of predatory labor organization may be 
called, for want of a better name, guerilla unionism. This variety 
resembles the first in the absence of fixed principles and in the ruth- 
less pursuit of immediate ends by means of secret and violent meth- 
ods. It is to be distinguished from hold-up unionism, however, by 
the fact that it operates always directly against its employers, never 
in combination with them, and that it cannot be bought off. It is 
secret, violent, and ruthless, seemingly because it despairs of attain- 
ing what it considers to be legitimate ends by business, uplift, or 
revolutionary methods. This union variant has been illustrated re- 
cently in the campaign of destruction carried on by the Bridge and 
Structural Iron Workers. 

B. THE VIEWPOINTS OF LABORER AND CAPITALIST 
287. The Sons of Martha 

BY RUDYARD KIPLING 

The Sons of Mary seldom bother,- for they have inherited that good 

part, 
But the Sons of Martha favor their mother of the careful soul and 

the troubled heart ; 
And because she lost her temper once, and because she was rude 

to the Lord, her guest, 
Her sons must wait upon Mary's sons — world without end, reprieve 

or rest. 

It is their care in all the ages to take the buffet and cushion the 

shock ; 
It is their care that the gear engages, it is their care that the switches 

lock: 
It is their care that wheels run truly; it is their care to embark 

and entrain. 
Tally, transport, and deliver duly the Sons of Mary by land and 

main. 

They say to the mountain, "Be ve removed !" They say to the lesser 

floods, "Run dry!" 
Under their rods are the rocks reproved — they are not afraid of 

that which is nigh. 
Then do the hilltops shake to the summit; then is the bed of the 

deep laid bare. 
That the Sons of Mary may overcome it, pleasantly sleeping and 

unaware. 



TRADE UNIONISM 589 

They finger Death at their glove's end when they piece and repiece 

the Hving wires; 
He rears against the gates they tend ; they feed him hungry behind 

their fires. 
Early at dawn ere men see clear they stumble intO' his terrible stall, 
And bait himi forth like a haltered steer and goad and turn him till 

evenfall. 

To these from birth is belief forbidden; from these till death is 

relief afar — 
They are concerned with matters hidden — under the earth line their 

altars are: 
The secret fountains to follow up, waters withdrawn to restore to 

the mouth, 
Yea, and gather the floods as in a cup, and pour them again at a 

city's drouth. 

They do not preach that their God will rouse them a little before the 

nuts work loose; 
They do not teach that His Pity allows them to leave their work 

whenever they choose. 
As in the thronged and lightened ways, so in the dark and the desert 

they stand. 
Wary and watchful all their days, that their brethren's days may be 

long in the land. 

Lift ye the stone, or cleave the wood, to make a path more fair or 

flat, 
Lo ! it is black already with the blood Sons of Martha spilled for 

that. 
Not as a ladder from earth to heaven, not as an altar to any creed. 
But simple service, simply given to his own kind, is their common 

need. 

And the Sons of Mary smile and are blessed — they know the angels 

are on their side; 
They know in them is the grace confessed, and for them are the 

mercies multiplied ; 
They sit at the feet and they hear the word — they know how truly 

the promise runs ; 
They have cast their burden upon the Lord — and the Lord, He lays 

it on Martha's sons. 



590 CURRENT ECONOMIC PROBLEMS 

288. The Viewpoint of the Trade Unionists^ 

BY ROBERT F. HOXIE 

Among the main charges brought against the unionist by the 
employer are these: first, that he refuses to- recognize the generally 
conceded rights of the employing class ; secondly, that he does not 
recognize the sacredness of contract ; thirdly, that while he is strug- 
gling to obtain higher wages and shorter hours of work, he per- 
sistently attempts to reduce the efficiency of labor and the extent 
of the output. Assuming these charges to be substantially correct, 
let us in the case of each seek without prejudice to discover the 
real grounds of the laborer's attitude and action. 

I. The "rights" which the employer claims, and which the 
unionist is supposed to> deny, may perhaps be summarily expressed 
in the phrase, "the right of the employer to manage his own busi- 
ness." To the employer it is a common-sense proposition that his 
business is his own. To him this is not a subject of argument. It 
is a plain matter of fact and carries with it the obvious rights of 
management unhampered by the authority of outside individuals. 
But to the laborer it is different. 

The laborer, like all the rest of us, is the product of heredity 
and environment. That is to say, he is not rational in the sense 
that his response to any given mental stimulus is invariable. On 
the contrary, like the rest of us, he is a bundle of notions, preju- 
dices, beliefs, unconscious preconceptions and postulates, the pro- 
duct of his peculiar heredity and environment. These unconscious 
and subconscious psychic elements necessarily mix with and color 
his immediate activity. What is or has been outside his ancestral 
and personal environment must be either altogether incomprehen- 
sible to him, or else must be conceived as quite like or analogous 
to that which has already been mentally assimilated. He cannot 
comprehend what he has not experienced. 

Now, it is well known that the environment of the laborer 
under the modem capitalistic system has tended to become predom- 
inantly one of physical force. He has been practically cut off from 
all knowledge of market and managerial activities. The ideals, 
motives, and cares of property-ownership are becoming foreign 
to him. More and more, in his world, spiritual forces are giving 
way to the apparent government and sanction of blind physical 
causation. In the factory and the mine spiritual, ethical, custo- 
mary, and legal forces and authorities are altogether in the back- 

^Adapted from "The Trade-Union Point of View," in the Journal of Po- 
litical Economy, XV, 345-356 (1907). 



TRADE UNIONISM 591 

ground. Everything to the worker, even his OAvn activity, is the 
outcome of physical force, apparently undirected and unchecked 
by the spiritual element. The blast shatters the rock, and whatever 
of flesh and blood is in range is also torn in pieces. The presence 
and the majesty of the law and contract are altogether ineffective 
in the face of physical forces let loose by the explosion. In like 
manner the knife cuts, the weight crushes, the wheel mangles the 
man and the material with equal inevitableness. No sanction, re- 
ligious, moral, customary, or legal, is there. Even outside the 
strictly mechanical occupations the machine and the machine pro- 
cess are coming to dominate the worker, and the growth in size 
of the industrial unit renders his economic relationships ever more 
impersonal — withdraws farther from his knowledge the directing 
and controlling spiritual forces. The laborer thus environed in- 
evitably tends to look upon physical force as the only efficient cause 
and the only legitimizing sanction. He tends to become mentally 
blind to spiritual, legal, contractual, and customary forces and their 
effects. 

To the laborer, as the product of this environment, the pro- 
prietary and managerial claims of the emplo3^er tend to become, of 
necessity, simply incomprehensible. The only kind of production 
which he can recognize is the material outcome of physical force — 
the physical good. Value unattached to and incommensurable with 
the physical product or means of production is to him merely an in- 
vention of the employing class to cover up unjust appropriation. 
He knows and can know nothing about the capitalized value of 
managerial ability or market connections. To him, then, the im- 
portant point is : By what physical force are these things made 
what they are? It is a matter of simple observation that the em- 
ployer exerts no direct or appreciable physical force in connection 
with the productive process. Therefore, in the eyes of the laborer, 
he simply cannot have any natural rights of proprietorship and 
management based on productive activity. 

In the same way all other grounds on which ownership and the 
managerial rights of the employer are based have become incon- 
clusive to the laborer. Appropriation, gift, inheritance, saving, con- 
tract, in themselves do not produce any phvsical effect on the only 
goods which he can recognize. Therefore they cannot be used to 
prove property in any just or natural sense. They hold in practice 
simply because back of them is the physical force of the police 
and army established and maintained by the middle class to protect 
its proprietary usurpations. Thus the whole claim of the em- 
ployer to the right to manage his own business to suit himself 



592 CURRENT ECONOMIC PROBLEMS 

has become and is becoming in a way incomprehensible to the 
laborer on groimds of natural equity. At the same time, by virtue 
of habit and the sanction of physical force as a productive agent, he 
sees himself ever more clearly the rightful proprietor of his job and 
of the products of it. All this is the natural and inevitable outcome 
of the conditions under which he lives and toils. 

2. The unionist laborer does not recognize the sacredness of 
contract. This is, if anything, a more serious charge than the pre- 
ceding one. 

As a matter of fact, the laborer is so circumstanced that obli- 
gations of contract with the employer must appear secondary in im- 
portance to his obligations to fellow-workers. This is not difficult 
to show. Ever since the establishment of the money-wage system, 
the everyday experience of the laborer has been teaching him the 
supreme importance of mutuality in his relations with his immediate 
fellow'-workers. The money payment, related not to the physical 
result of his efforts, but to its economic importance, has been blot- 
ting out for him any direct connection between effort and reward. 
Experience has taught him to look upon his labor as one thing in 
its effects and another thing in its reward. As a thing tO' be re- 
warded he has learned to consider it a commodity in the market. 
As such he knows that it is paid for at competitive rates. He has 
learned that, if he undercuts his fellow, prompt retaliation follows, 
to the detriment of both, and he has learned that combination with 
his fellow results in better immediate conditions for both. 

The worker does not, of course, look far beyond the immediate 
results. In severing the obvious connection between his task and 
the complete product, in removing from him all knowledge of the 
general conduct and condition of the business, in paying to him 
a fixed wage regardless of the outcome of the particular venture, 
and in paying him a wage never much in excess O'f his habitual 
standard of living, the factory and wage system have accustomed 
him to a hand-to-mouth existence, have barred him from all the ' 
training effects of property-ownership, and have atrophied his 
faculties of responsibility and foresight. Moreover, it is not to be 
expected that today's empty stomach will be comforted by tomor- 
row's hypothetical bread, least of all by bread which is likely to 
comfort the stomach of another. Is it any wonder, then, that the 
laborer does not and that he cannot follow the economist in his 
complicated arguments tO' prove that, in the long run and on the 
whole, the keenest competition among laborers brings the highest 
rewards ? 



TRADE UNIONISM 593 

Proneness to breach of contract, therefore, is seen to be a na- 
tural and evitable outcome of his life and working conditions. 

3. The third charge against the unionist which we have under- 
taken to examine states that while he is struggling for increase 
of wages he is at the same time attempting to reduce the efficiency 
of labor and the amount of the output. In other words, while he 
is calling upon the employer for more of the means of life he is 
doing much to block the efforts of the employer to increase those 
means. 

There is no doubt that this charge is to a great extent true. In 
reasoning upon this matter the employer, viewing competitive so- 
ciety as a whole, assumes that actual or prospective increase in the 
goods' output means the bidding-up of wages by employers anxious 
to invest profitably increasing social income. It follows that in 
competitive society laborers as a whole stand to gain with im- 
provements in industrial effort and process. In the case of the in- 
dividual competitive establishment it is clear that the maximum 
income is ordinarily to be sought in the highest possible efficiency, 
resulting in increased industrial output. At least this is true where 
there are numerous establishments of fairly equal capacity pro- 
ducing competitively from the same market. Under such circum- 
stances the increased output of any one establishment due to "speed- 
ing up" will ordinarily have but a slight, if any, appreciable effect on 
price. Each individual entrepreneur, therefore, is justified in as- 
suming a fixed price for his product and in reckoning on increase 
of income from increase of efficiency and industrial product. Ap- 
parently it rarely occurs to the employer that this analysis is not 
complete. Having assumed that definite laws determine the man- 
ner in which income is shared among the productive factors, he 
apparently concludes, somewhat naively, that just as the laborers 
in society will in the aggregate profit by increase in the social in- 
come, so also will the laborers in any individual establishment profit 
by increase in its income. 

To this mode of reasoning, and to the conclusions reached 
through it, the unionist takes very decided exceptions. To the 
statement that labor as a whole stands to gain through any increase 
in the social dividend he returns the obvious answer that labor as a 
whole is a mere academic conception ; that labor as a whole may 
gain while the individual laborer starves. His concern is with his 
own wage-rate and that of his immediate fellow-workers. He has 
learned the lesson of co-operation within his trade, but he is not 
yet class-conscious. In answer to the argument based on the in- 
dividual competitive establishment he asserts that the conditions 



594 CURRENT ECONOMIC PROBLEMS 

which determine the income of the estabHshment are not the same 
as those which govern the wage-rate. Consequently, increase in the 
income of the estabHshment is nO' guarantee of increase of the 
wage-rate of the worker in it. Conversely, increase in the wage- 
rate may occur without increase in the income of the establishment. 
Indeed, in consequence of this non-identity of the conditions gov- 
erning establishment income and wage-rate, increase in the gross 
income O'f the establishment is often accompanied by decrease in 
the wage-rate, and the wage-rate is often increased by means which 
positively decrease the gross income oi the establishment. 

The laborer's statements in this instance are without doubt well 
founded. The clue to the whole situation is, of course, found in 
the fact that the wage-rate of any class of laborers is not determined 
by the conditions which exist in the particular establishment in 
which they work, but by the conditions which prevail in their trade 
or "non-competing group." With this commonplace economic argu- 
ment in mind, the reasonableness of the unionist's opposition to 
speeding up, and of his persistent efforts to hamper production, at 
once appears. 

289. Articles of Faith 

a) An Economic ^Creed^^ 

The National Association of Manufacturers of the United States 
of America does hereby declare that the following principles shall 
govern the x\ssociation ii: its work in connection with the problems 
O'f labor: 

1. Fair dealing is the fundamental and basic principle on 
which relations between employes and employers should rest. 

2. The National Association of Manufacturers is not opposed 
to organizations of labor as such, but it is unalterably opposed to 
boycotts, black-lists and other illegal acts of interference with the 
personal liberty oi employer and employe. 

3. No person should be refused employment or in any way 
discriminated against on account of membership or non-membership 
in any labor organization, and there should be no discriminating 
against or interference with any employe who is not a member 
of a labor organization by members of such organizations. 

4. With due regard to contracts, it is the right of the employe 
to leave his employment whenever he sees fit, and it is the right of 
the employer to discharge any employe when he sees fit. 

'Resolutions adopted at the Eighth Annual Convention of the National 
Association of Manufacturers, New Orleans, April, 1903. 



TRADE UNIONISM 595 

5. Employers must be free tO' emplo);' their work people at 
wages mutually satisfactory, without interference or dictation on 
the part of individuals or organizations not directly parties to such 
contracts. 

6. Employers must be unmolested and unhampered in the 
management of their business, in determining the amount and 
quality of their product, and in the use of any methods or systems 
of pay which are just and equitable. 

7. In the interest of employes and employers of the country, 
no limitation should be placed upon the opportunities of any person 
to learn any trade to which he or she may be adapted. 

8. The National Association of Manufacturers disapproves ab- 
solutely of strikes and lock-outs, and favors an equitable adjust- 
ment of all differences between employers and employes by any 
amicable method that will preserve the rights of both parties. 

9. Employes have the right to contract for their services in a 
collective capacity, but any contract that contains a stipulation that 
employment should be denied to men not parties to the contract 
is an invasion of the constitutional rights of the American work- 
man, is against public policy, and is in violation of the conspiracy 
laws. This Association declares its unalterable antagonism to the 
closed shop and insists that the doors of no industry be closed 
against American workmen because of their membership or non- 
membership in any labor organization. 

10. The National Association of Manufacturers pledges itself 
to oppose any and all legislation not in accord with the foregoing 
declaration. 

h) A Political Creed'^ 

Whereas, The National Association of Manufacturers, in con- 
vention assembled in New Orleans, in 1903, adopted, declared and 
promulgated certain principles governing the work of the associ- 
ation in connection with problems of labor; and 

Whereas, The past decade has demonstrated the truth of these 
declared principles ; and 

Whereas, During the past ten years new and different problems 
have also emerged, affecting our governmental, economic and in- 
dustrial society, upon which we deem it our duty at this time to 
express our attitude and stand ; therefore 

''Resolutions adopted at the Eighteenth Annual Convention of the Na- 
tional Association of Manufacturers, Detroit, May, 1913. 



596 CURRENT ECONOMIC PROBLEMS 

Resolved, That in addition to the principles heretofore enunci- 
ated and declared at our convention in New Orleans in 1903, we, in 
convention assembled, declare and promulgate, in addition, the fol- 
lowing declaration of principles : 

First. We hold that the inherent powers of our courts of equity 
shall not be abridged in the issuance of injunctions in labor dis- 
putes. 

Second. We hold that the power vested in our courts to punish 
for contempt of court should not be abridged by the granting of 
jury trial for contempt. 

Third. We protest against class legislation, whether enacted by 
state legislatures or congress, and we assert that all forms of class 
legislation are un-American and detrimental to our common good. 

Fourth. We pledge our loyalty to our judiciary, upon the main- 
tenance of which, unswerved by passing clamor, rests the perpetu- 
ation of our laws, our institutions and our society. 

Fifth. We favor the further enactment of equitable, beneficial, 
and simplified workingmen's compensation legislation. 

Sixth. We denounce the subserviency of representatives of the 
whole people to the dictation of any class legislation. 

Seventh. We affirm, in the light of proven facts, that any com- 
promise, toleration, or identification with the leaders of criminal 
unionism will stultify our liberties and weaken respect for our laws 
and their just enforcement. 

Eighth. We affirm our approval of the enactment of wise and 
just laws, necessary to improve conditions of labor. 

Ninth. We affirm that our tested, self-controlled, representative 
democracy is adequate, under our constitutional guarantees, to ef- 
fectuate the real needs and purposes of our national life. 

Tenth. We pledge ourself towards the accom.plishment of the 
spirit and purpose of the foregoing. 

C. CHARACTER AND PURPOSES OF TRADE UNIONS 
290. The Undemocratic Character of Trade Unions^ 

BY CHARI,i;S W. ELIOT 

Trades unionism came into being under undemocratic forms of 
government shortly after the new developments of mechanical 
power changed completely the methods and conditions of many 

^Adapted from The Future of Trades Unionism and Capitalism in a De- 
mocracy, 9-29. Copyright by Kenyon College (1909). 



TRADE UNIONISM 597 

fundamental industries. The methods of the new trades unions, or- 
ganized to improve the condition of the laboring people, were neces- 
sarily the methods of fighting, violence, and war. The conflicts of 
the employed with the employers were often barbarous and cruel 
on both sides. Nevertheless, the efforts of the unions were gradu- 
ally successful. Through them higher wages and shorter hours 
were procured at a time when no disinterested and humane person 
could doubt that wages were too low and hours too long. This clear 
success gave the working people confidence in the violent methods 
employed. Gradually new policies, looking toward the creation of 
a monopoly of labor in each particular trade by the union of that 
trade, came into use. 

The first is the limitation in the number of apprentices that shall 
be employed in a given trade. This limit of the number is or- 
dinarily far below the number which it would be for the inter- 
est of the proprietor to employ. The object of this limitation is to 
keep down the number of journeymen in the trade, so as to prevent 
the coming into the trade of a number of persons so great as to 
affect the rate of wages. With a similar intention, trades unions 
have in general resisted the introduction of trade schools into pub- 
lic school systems, and have also' been disposed to interfere with 
the work of private or endowed trade schools. The policy of limit- 
ing the number of apprentices flies in the face of the American 
doctrine that education should be free to all, and should furnish a 
useful training for the practice of any art, trade, or profession. 
Moreover, it is a selfish and monopolistic policy without mitigation. 

Furthermore, many unions lay down rules which make it hard 
for a journeyman to become an employer, prescribing, for example, 
that no one shall become an employer until he is prepared to em- 
ploy a specified number of journeymen. Such rules tend to stiffen 
every class or set of mechanics or operatives. Each class is hard 
to get into, and still harder to get out of ; so that the true democratic 
mobility between classes or sets of working people is seriously im- 
paired. It is a survival of the fighting times of trades unionism. 
Every fighting organization is compelled to sacrifice in large meas- 
ure the individual liberty of its members. Herein unionism and 
democracy are in absolute opposition. 

Two other monopolistic inventions have, within years com- 
paratively recent, been adopted by trades unionism, the boycott and 
the union label. The boycott is intended to prevent all persons from 
buying, or even handling commercially, articles not made by union 
labor; and the union label is intended to support the boycott, and 
to enable and induce the public to discriminate against articles which 



598 CURRENT ECONOMIC PROBLEMS 

do not bear the label. The object of both policies is to secure all 
the productive labor in a given trade for union men; to this end 
articles or goods made by non-union men must find no market. The 
monopolistic aim of these policies is perfectly plain. 

Many unions refuse to handle in their respective trades materials 
made by non-union labor, or coming from factories which are not 
conducted exclusively by union rules. This policy, if carried out 
successfully by a strong union which covers a large area, is capable 
of forcing the manufacturer to unionize his establishment ; where- 
upon the unfortunate consumer is likely to be at the mercy of the 
manufacturer and the union combined. These monopolistic com- 
binations are often entirely successful in the United States, or in 
large parts thereof, particularly in the building trades, and their 
recent successes account for a considerable portion of the great rise 
of prices which has taken place in this country during the last five 
years. 

The manufacturer O'f plumbers' supplies, for example, makes 
an agreement that he will sell only to jobbers and to plumbers. The 
jobber agrees that he will sell only to plumbers. The plumbers are 
all union men. The owner oi a building under construction can- 
not buy plumbers' supplies unless from some independent manufac- 
turer who is not in the combination. If he buys of such an inde- 
pendent manufacturer, the plumbers at work in his building will 
not touch the materials he has bought. In the district covered by 
such an agreement there is no^ competition which is really free. 

It would be hard to exaggerate the intense opposition between 
all these monopolistic policies and the individual freedom in edu- 
cation, in family life, in productive labor, and in trade, which is the 
object and end oi democracy. The limitation of output is a trades- 
union practice which combines in an unwholesome way a selfish 
unfaithfulness to duty in the individual workman with a deceptive 
notion of philanthropic interest in fellow-workmen. 

Another trades-union doctrine that has had a very unfortunate 
efi^ect on individual character is the doctrine or practice of the min- 
imum wage. In practice that wage turns out tO' be a uniform maxi- 
mum wage, and it is ordinarily put at a level above the worth of 
the less skillful workmen. This practice is for the pecuniary interest 
of the younger and least skillful workmen, who, as a rule, pre- 
dominate in the union, or at least are its most assiduous members. 
The first effect of this practice is to deprive the younger members 
of a union of all motive for improvement. A youth receives at the 
start the uniform wage, and the veteran who is a member of the 
same union is receiving no more. No effort on his part can raise his 



TRADE UNIONISM 599 

wages. The disastrous effect of this poHcy of the uniform wage 
on the desirable and happy increase of inteUigence, efficiency, and 
good will as life goes on, is perfectly apparent. Now a true democ- 
racy means endless variety of capacity freely developed and appro- 
priately rewarded. Uniformity of wages ignores the diversity of 
local conditions as well as of personal capacity, obstructs the am- 
bitioiiis workman, cuts off from steady employment those who can- 
not really earn the minimum wage, and interferes seriously with 
the workman's prospect of improving his lot. 

It is high time it should be generally understood that trades 
unionism in important respects works against the very best effects 
of democracy. 

291. An Employer's View of Trade Unions" 

BY ANDREW CARNEIGIE 

The influence of trades-unions upon the relations between the 
employer and employed has been much discussed. Some establish- 
ments in America have refused to recognize the right of the men 
to form themselves into these unions, although I am not aware 
that any concern in England would dare to take this position. This 
policy, however, may be regarded as only a temporary phase of the 
situation. The right of the workingmen to combine and to form 
trades-unions is no less sacred than the right of the manufacturer 
to enter intoi. associations and conferences with his fellows, and it 
must sooner or later be conceded. Indeed, it gives one but a poor 
opinion of the x\merican workman if he permits himself to be de- 
prived of a right which his fellow in England long since conquered 
for himself. My experience has been that trades-unions, upon the 
whole, are beneficial both to labor and to capital. They certainly 
educate the working-men, and give them a truer conception of the 
relations of capital and labor than they could otherwise form. The 
ablest and best workmen eventually come to the front in these 
organizations ; and it may be laid down as a rule that the more in- 
telligent the workman the fewer the contests with employers. It is 
not the intelligent wO'rkman, who knows that labor without his 
brother capital is helpless, but the blatant ignorant man, who re- 
gards capital as the natural enemy of labor, who does so much to 
embitter the relations between employer and employed; and the 
power of this ignorant demagogue arises chiefly from the lack of 
proper organization among the men through which their real voice 

^Adapted from The Gospel of Wealth and Other Timely Essays, 114-116. 
Copyright by Doubleday, Page & Co. (1906). 



6oo CURRENT ECONOMIC PROBLEMS 

can be expressed. This voice will always be found in favor of the 
judicious and intelligent representative. Of course, as men become 
intellig-ent more deference must be paid to them! personally and to 
their rights, and even tO' their opinions and prejudices; and, upon 
the whole, a greater share of profits must be paid in the day of 
prosperity to the intelligent than to the ig-norant workman. He 
cannot be imposed upon so readily. On the other hand, he will 
be found much readier to- accept reduced compensation when busi- 
ness is depressed ; and it is better in the long run for capital to be 
served by the highest intelligence, and tO' be made well aware of the 
fact that it is dealing with men who know what is due to them, 
both as to treatment and compensation. 

292. The Purposes of Trade Unionism" 

BY JOHN MITCPIELL 

In its fundamental principle trade unionism is plain and simple. 
Trade unionism starts from a recognition of the fact that under 
normal conditions the individual, unorganized workman cannot 
bargain advantageously with the employer for the sale of his labor. 
Since he has no money in reserve and must sell his labor immedi- 
ately, since he has no knowledge of the market and no skill in 
bargaining, since, finally, he has only his own labor to sell, while 
the employer engages hundreds or thousands of men, and can easily 
do without the services of any particular individual, the working- 
man, if bargaining on his own account and for himself alone, is at 
an enormous disadvantage. Trade unionism recognizes the fact 
that under such conditions labor becomes more and more degener- 
ate, because the labor which the workman sells is a thing of his 
very life and soul and being. In the individual contract between 
the rich employer and the poor laborer, the laborer will secure the 
worst of it. The individual contract means that the worst and 
lowest man's condition in the industry will be that which the best 
man must accept. From first to last, from beginning to end, always 
and everywhere, trade unionism stands opposed to the individual 
contract. There can be no concession or yielding upon this point. 
There can be no permanent prosperity of the working classes, no 
consecutive improvements in conditions, until the principle is firmly 
and fully established, that in industrial life, the settlement of wages, 
the hours of labor, and all conditions of work, must be made be- 
tween employers and workingmen collectively and not individually. 

^"Adapted from Organized Labor, 2-1 1. Copyright by the American 
Book and Bible House (1903). 



TRADE UNIONISM 6oi 

Trade unionism thus recognizes that the destruction of the 
workingman is the individual bargain, and the salvation of the 
workingman is the joint, united, or collective bargain. To carry 
out a joint bargain, however, it is necessary to establish a minimum 
of wages and conditions which will apply to all. By this it is not 
meant that the v/ages of all shall be the same, but merely that equal 
pay shall be given for equal work. If some are so willing to be 
over-rushed as to do more than a fair day's work for a fair day's 
wage, or are willing to allow themselves to be forced into patron- 
izing truck stores, to submit toi arbitrary fines or unreasonable 
deductions, whereas others would rebel at these impositions, it 
would result that in the competition among the men to retain their 
positions, those who were most pliant and lowest spirited would 
secure the work, and the wages, hours of labor, and conditions of 
employment would be set or accepted by the poorest, most cringing, 
and least independent of workers. If the trade union did not insist 
upon enforcing common rules providing for equal pay for equal 
work and definite conditions of safety and health for all workers 
in the trade, the result wo^uld be that all pretense of a joint bargain 
would disappear, and the employers would be free constantly to 
make individual contracts with the various members of the union. 

The trade union does not stand for equal earnings for all work- 
men. It does not object tO' one man's earning twice as much as the 
man working by his side, provided both men have equal rates of 
pay, equal hours of work, equal opportunities of securing work, 
and equal conditions of employment. What the union insists upon is 
that certain minimum requirements be fulfilled for the health, com- 
fort, and safety of all, in order that the workingmen shall not be 
obliged to compete for jobs by surrendering their claims tO' a reas- 
onable amount of protection for their health, and for their life and 
limb. 

The trade union thus stands for freedom of contract on the part 
of workingmen — the freedom or right to contract collectively. The 
trade union also stands for definiteness of the labor contract. The 
workingman agrees to work at a wage offered him by his employer, 
but frequently nothing is said as tO' hours of labor, periods for 
meals and rest, intensity of work, conditions of the workshop, pro- 
tection of the workmen against filthy surroundings or unguarded 
machinery, character of his fellow- workmen, liability of the em- 
ployer for accident, nor any of the thousand conditions which 
affect the welfare of the workman and the gain of both employer 
and employee. In the absence of an agreement with the union it 



6o2 CURRENT ECONOMIC PROBLEMS 

is in the power of the employer to rrnake such rules absolutely, or 
to change or amend them at such times as he thinks proper. 

The right tO' bargain collectively necessarily involves the right 
to representation. Experience and reason both show that a man, 
who is dependent upon the good will of an employer, is in no po- 
sition to negotiate with him. Workingmen should have tHe right 
to be represented by whomsoever they wish. The denial of the 
right of representation is tyranny. Without the right to choose 
their representatives, the men cannot enjoy the full benefit of col- 
lective bargaining; and without the right of collective bargaining, 
the door is open to the evils of the individual contract. To avoid 
these calamities the workmen demand "the recognition of the 
union." 

D. THE THEORY OF UNIONISM 
293. The Principle of Uniformity" 

BY ROBERT F. HOXIS 

The key to the understanding of union rules and actions is to be 
found in the fundamental principles and theories of their program. 
If you understand these thoroughly and the policies to which they 
give rise, you can generally explain any given rule or act without 
difficulty; and without that understanding you are almost certain to 
go astray. In the space available it is barely possible to illustrate 
in a general way these theories. 

Let us, then, by way of illustration, take one of the fundamental 
principles of Business Unionism, the principal of uniformity or 
standardization, and use it as a partial explanation of union poli- 
cies, demands, and methods. This principle requires that all the 
men doing the same work use the same kind of tools and materials, 
work normally the same length of time, and at the same speed, turn 
out the same quantity and quality of goods, and receive the same 
rate of wages. The union argument on which the principle rests 
runs somewhat as follows : 

I. Wages and conditions of employment are determined by 
the relative bargaining strength of the workers and employers of the 
industrial group. 

^^Adapted from an unpublished lecture entitled "The Trade-Union Pro- 
gram," delivered at the University of Michigan, May 17, 1914. The state- 
ments in this paper are general and admit of many exceptions. They consti- 
tute a theoretical statement of the tendencies underlying union activities 
rather than a generalization from such activities. They are not clearly un- 
derstood even by all unionists. 



TRADE UNIONISM 603 

2. Under competitive conditions the bargaining strength of the 
employer is greater than that of the individual laborer, because of 
(a) the superior bargaining knowledge, skill, and waiting power of 
the employer; {h) the smaller object which he has at stake — pe- 
cuniary profits versus life; (c) the presence of an actual or potential 
oversupply of labor; (rf) the increase in bargaining power on the 
part of the employer in inverse ratio to his industrial and financial 
strength; {e) the limitation of the bargaining strength of the labor 
group to the competitive strength of its weakest member. 

3. The full bargaining strength of the employer is bound to be 
exercised against the workers because under competitive conditions 
the pressure of the consuming public for cheap goods is transmitted 
through the retailer and the wholesaler to the most unscrupulous 
employer, who sets the pace ; while under monopolistic conditions 
the relations of the employer and the worker are impersonal. 

4. Therefore, allowing the employer to pit his bargaining 
strength against the bargaining strength of each worker, thus fixing 
their different rates of work, wages, etc., means the progressive 
deterioration of the wages and conditions of employment of the 
group. 

5. The only way to prevent this deterioration is to rule out com- 
petition by establishing and maintaining the principle of uniformity 
or standardization, i. e., to require for all the men doing the same 
work the use of the same kinds of tools and materials, the same 
working time, the same speed, the same quality of work, and the 
same output. 

Now let us see what light this policy throws upon the policies, 
demands, methods, and attitudes found in the union program. The 
main purpose of this principle, as we have seen, is to rule out com- 
petition. But competition is possible in regard to the wage rate, 
hours of labor, or the exertion and output of the individual. To 
prevent the first the establishment of a standard rate of wages at a 
fixed minimum is necessary. The prevention of the second re- 
quires the fixing of a normal day or week as a maximum. The third, 
in like manner, necessitates uniformity in the conditions and rate 
of work. It is obvious that these conditions working together make 
the standard rate a practical maximum as well as a minimum. Hence 
there arises the tendency toward dead-line mediocrity. 

Competition, however, is possible not only in regard to the wage 
rate, the hours, and the exertion or output, but also in regard to the 
safety and sanitation, the comfort and convenience of the shop ; the 
times of beginning and ending work ; the arrangement of shifts ; the 



6o4 CURRENT ECONOMIC PROBLEMS 

time, place, mode, and character of pay; the materials and tools 
used; and all the minor details of the conditions of work and pay. 
Hence, to secure uniformity, there arises the necessity of minute 
specifications of standards in regard to all the incidents of work 
and pay, from which no deviation can normally be allowed. This 
explains a multitude of petty and harassing restrictions, of which 
employers complain, the validity of which rests, not on their im- 
mediate character and effects, but on the validity of the general 
principle of uniformity, 

A large part of the Trade-Union Program is thus seen to be a 
direct effort to establish specific standards incidental to the prin- 
ciple of uniformity. Another large portion is in the interest of en- 
forcement of conditions essential to their existence. 

Let us first consider the latter. It is evident that these stand- 
ards cannot exist if they are violated with impunity ; still successful 
enterprise demands flexibility. Hence there has grown up a long 
list of irregularities and violations permitted but charged with pen- 
alties. These have the double object of stopping underbidding and 
of preventing the irregular practices from becoming regularly estab- 
lished. For example, overtime, the doing of extraordinary kinds of. 
work, and the doing of work in irregular ways are allowed, but only 
on condition of extra pay. 

These standards, moreover, are hard to establish and maintain 
in a thoroughly dynamic industrial state, where new trades are 
evolving, and new processes are coming in constantly. This in part 
explains the undoubted tendency of unions to restrict new trades, 
new machinery, new methods, and new processes in industry — in 
short, industrial progress. 

Now if we turn to the enforcement of these standards, we shall 
find that another large block of union policies and demands are, in 
part at least, in the interests of the principle of uniformity, and are 
valid if it is valid. The enforcement of these standards means the 
Common Rule. But to secure this you must have Collective Bar- 
gaining, or legislation. Collective Bargaining implies recognition of 
the union and all the complex machinery for the making and enforce- 
ment of contracts. 

Moreover, you cannot enforce these standards unless you control 
the Workers or the Working Personnel. This, in part, explains 
apprenticeship regulations, and to the unionist calls absolutely for 
the Closed Shop and the control of hiring and discharge of men. It 
is evident that if you cannot control the men you cannot cut out 
underbidding in its manifold guise. This is especially true, since the 



TRADE UNIONISM 605 

employer is always supposed to be trying to induce it by Swifts, 
bell-horses, secret bonuses, frightening the men, etc. 

To enforce uniformity you must also have control over the out- 
put of the individual and you must control the processes of produc- 
tion. You must prevent the use of methods of stimulation, such as 
bonus systems, etc., by the employer. Moreover, you must stop up 
every minutest loophole for the evasion of the principle by the 
employer. Hence you must watch him carefully; you must have 
walking delegates on the job. You must carefully delimit the field 
of work, and prevent reclassification, so that the employer cannot 
create exceptions by the use of new men or new work. Here again 
we find explanation of a great number of harassing detailed de- 
mands and rules which the union endeavors to enforce. 

It follows, then, that a large portion of the more specific part of 
the trade-union program is implied in the principle of uniformity 
and flows directly from the effort to establish and enforce it. 



294. Collective Bargaining and the Trade Agreement^^ 

BY JOHN R. COMMONS 

Philanthropists have long Ibeen dreaming of the time when cap- 
ital and labor should lay aside the strike and boycott and should re- 
sort to arbitration. By arbitration they understand the submission 
of differences to a disinterested third party. But the philanthropists 
have overlooked a point. Arbitration is never accepted until each 
party to a dispute is equally afraid of the other; and when they 
have reached that point, they can adopt something better than arbi- 
tration, — namely, negotiation. Arbitration is impossible without or- 
ganization, and two equally powerful organizations can negotiate as 
well as arbitrate. This higher form of industrial peace — negoti- 
ation — has now reached a formal stage in a half dozen large in- 
dustries in the United States, which, owing to its remarkable like- 
ness to parliamentary government in the country of its origin, Eng- 
land, may well be called constitutional government in industry. 

The bituminous mine operators and the bituminous mine work- 
ers of the four great states of Illinois, Indiana, Ohio' and Penn- 
sylvania have such a constitution. The annual interstate conference 
of the bituminous coal industry is the most picturesque and inspir- 
ing event in the modern world of business. Here is an industry 

^Adapted from "A New Way of Settling Labor Disputes," in the Amer- 
ican Review of Reviews, XXIII, 328-333. Copyright (igoi). 



6o6 CURRENT ECONOMIC PROBLEMS 

where, for many years, industrial war was chronic, bloodshed fre- 
quent, distrust, hatred, and poverty universal. Today the leaders 
of the two sides come together for a twO' weeks' parliament, face 
to face, with plain speaking, without politics, religion, or demagogy ; 
and there they legislate for an industry that sends upon the market 
annually $200,000,000 of product. 

The most comforting feature of such negotiations is the matter- 
of-fact way in which each side takes the other. There is none of 
that old-time hypocrisy on the part of the employers, that their 
great interest in life is to shower blessings upon their hands; and 
there is none of that ranting demagogy on the part of the work- 
men about the dignity of labor and the iniquity of capital. On the 
contrary, each side frankly admits that its ruling motive is self- 
interest ; that it is trying to get as much as it can and to give as 
little as it must; and that the only sanction which compels them to 
come together, and tO' stay together until they reach a unanimous 
vote, is the positive knowledge that otherwise the mines will shut 
down and neither the miner will earn wages nor the operator reap 
profits. It is simply wholesome fear that backs their discussions ; 
the capitalist knows that there are no other laborers in the world 
whom he can import as "scabs" to take the places of tho'se whose 
representatives face him in this conference and this scale com- 
mittee, and he knows, too, from a severe experience, that every one 
of these iio,ooo miners will obey as one man the voice of these 
their chosen representatives. The miners know, also, that these 
capitalists with whom they are negotiating are the very ones who 
control their only opportunities for earning the wages that feed 
themselves and their families. Consequently, everybody knows that 
an agreement must be reached before adjournment, or else the in- 
dustry will be reduced to anarchy and their wages and profits, to 
say nothing of lives, will be destroyed. 

In every trade agreement there are usually two large and dis- 
tinct questions on which the parties differ, namely, wages and meth- 
ods of managing employees. The labor side wants higher wages 
(including short hours) and restrictions on bosses and foremen. 
The employer side wants low wages and a free hand for the boss. 
Each side thereupon comes to the joint conference with demands 
more extreme than it expects to see granted. At the conference of 
1900 the operators offered an advance of 9 cents per ton and the 
miners demanded an advance of 20 cents. The operators wished to 
retain the system of paying for the screened coal only, and not for 
the slack and waste ; but the miners demanded payment on the basis 
of the "run-of-the-mine," i. e, of all coal brought to the surface, 
before it is run over the screens. The miners asked also 7 cents 



TRADE UNIONISM 607 

differential between pick and machine mining-, but the operators 
wanted 12 cents differential. 

These opposing propositions had been formulated in separate 
conventions and conferences by the opposing sides. The operators' 
position was presented to the joint conference and received the 
unanimous "aye" of the operators and the unanimous "no" of the 
miners. The miners' proposition was then presented, and received 
the unanimous "aye" of the miners and the unanimous "no" oi the 
operators. The two sides then began their parrying. Mr. Mitchell 
accused the operators of "joking." The operators accused the miners 
of absurdity. Several days were spent in these tilts. Finally con- 
cessions were made on both sides. Certain matters were left un- 
decided or referred back to the state conferences. The committee 
reported a unanimous agreement, and the joint conference adopted 
it unanimously. It gave an advance of 14 cents in some districts, 
and 9 cents in others. It permitted the "mine-run" standard in cer- 
tain districts, and the "screened" standard in other districts, and a 
"double standard" in yet a third group of districts, but regulated 
the size of the screen and fixed a wide differential between "mine- 
run" and a "regulation screen." Similar compromises were made on 
the machine scale, day labor, and all along the line. Nobody was 
satisfied, yet everybody was satisfied. It was the best they could do, 
and it saved the business from paralysis. "A failure to agree," 
said President Mitchell in his closing speech, "would not only have 
ruined the homes of the miners, but would have ruined the business 
of the operators." And though the miners did not get what they 
expected, yet, said Mitchell, "there has never been a time in the 
history of mining, even within the recollection of the oldest one 
among you, when an advance so great as this, and applied to so 
great a number of men, was secured." 

The success of each conference depends directly upon the en- 
forcement of the legislation of the preceding conference. Curiously 
enough, this enforcement falls solely upon the miners' organization. 
The operators, indeed, have their several state associations, but no 
national nor interstate association like that of the miners. More- 
over, the operators are loosely organized. They can bring only 
moral suasion to bear upon the recalcitrant operator who rebels 
at their national decrees. But the miners can do more; they not 
only can suspend their own local unions which violate the agree- 
ment, but they can shut down the mine of the rebellious operator 
and drive him out of business. The operators understand this, and 
they know that their own protection against the cutthroat operator 
depends solely on the Miners' Union. President Mitchell, oi the 
union, at the close of the Indianapolis conference, significantly ac- 



6o8 CURRENT ECONOMIC PROBLEMS 

cepted his office of joint executive in what might be called his in^- 
augural. He said, "I will give notice to the operators now that 
when they go home, unless they keep the agreement inviolate, we 
will call the men out; and I will serve notice on the miners that, 
unless they keep the laws of the organization, we will suspend them 
from the organization." 

In trade agreements the employer must recoignize the union. 
Employers are willing to pay high wages if all their competitors 
pay the same wages. It is not high wages that they dread, but secret 
and unfair cutting of wages. This is alsoi exactly what the laborers 
resist. The joint state or national agreements place all competito^rs 
on the samic basis in the same market. Indeed, in the coal trade 
the scale is nicely adjusted so that the districts with the better 
quality of coal and the lower railway charges are required to pay 
enough higher wages than other districts to counterbalance their 
superior natural advantages. On this basis, so far as the union 
enforces the agreement, every operator knows exactly what his 
competitor's coal is costing; there is no secret cutting; and the 
trade is not brought down to the level of the few unscrupulous and 
oppressive operators who grind down their laborers. For this reason 
the bulk of employers who have had experience with these joint 
agreements are heartily in favor of them. 

The most important result of these trade agreements is the 
rrew feeling of equality and mutual respect which springs up in 
both employer and employee. After all has been said in press and 
pulpit about the "dignity of labor," the only "dignity" that really 
commands respect is the bald necessity of dealing with labor on 
equal terms. With scarcely an exception the capitalist officials who 
make these agreements with the labor officials of these powerful 
unions testify to their shrewdness, their firmness, their temperance, 
their integrity, and their faithfulness to contracts. Magnificent gen- 
eralship is shown in combining under one leadership the miscel- 
laneous races, religions, and politics that compose the miners of 
America. The labor movement of no other country has faced such 
a problem. 

295. The Economics of the Closed Shop" 

BY ]?RANK T. STOCKTON 

In recent popular discussion of the closed shop much emphasis 
has been put upon its uneconomical character. The charge is made 
that the demand for the exclusive employment of union men, by 

^^Adapted from The Closed Shop in American Trade Unions, 165-175. 
Copyright by the Johns Hopkins Press (1911), 



TRADE UNIONISM 609 

interfering with the right of an employer to "run his own business," 
makes high efficiency impossible. This argument is based on the 
fact that the employer, under the competitive system, is alone re- 
sponsible for the successful conduct of business undertakings. If 
he fails to produce as well and as cheaply as others do, the loss is 
his. It is necessary, therefore, for the most economic conduct of 
business that the employer "should have power to order his own 
afifairs." He "should not be influenced by any other consideration 
in the hiring of men than the ability, fitness or loyalty of the appli- 
cant." At the same time he should be free to reward exceptional 
workmen and to discharge those who are inefificient or insubofdi- 
nate. He should be the sole judge as to the kind of machinery, 
tools, and material to be used. Only in this way, it is argued, can 
the employer secure that "effective discipline" which is essential in 
bringing about the "highest measure of success in industry." 

The "essence" of the open shop is that the employer is entirely 
free "to hire and discharge." The closed shop, on the other hand, 
denies him the "right to hire and discharge." If the employer 
wishes to hire competent non-union men, he is prevented from pro- 
curing their services if they cannot ot will not obtain union mem- 
bership. 

The employer complains that under the closed shop, instead of 
being able to secure wo^rkmen regardless of whether they are union 
or non-union, white or black, Catholic or Protestant, Jew or Gen- 
tile, he is compelled to draw from a definitely fixed labor market. 
Very often, too, this market is severely limited by the refusal of 
the unions on one ground or another to admit competent workmen 
to membership. He cannot hire members of other unions whO' are 
competent to do the work because this will at once involve him in 
a jurisdictional dispute. One trial is enough to demonstrate the 
fact that members of rival unions tolerate each others' presence less 
than they do that of non-unionists. There is then no practicable 
way in which he can secure additional help when his work increases 
except by bidding for workmen against other union employers. It 
is also said that the closed shop serves to prevent the discharge of 
inefficient employees. 

Another evil attributed to the closed shop is that it establishes a 
minimum wage which becomes virtually also a maximum wage. 
This is said to produce a disastrous "dead level" of efficiency 
throughout an estaiblishment and to discourage effort. Accordingly 
union control is declared tO' be "absolute death to individual effort 
and ambition," and to cause the degeneration of "mental and moral 
fiber." Restriction of output is the direct result of such conditions. 



6io CURRENT ECONOMIC PROBLEMS 

Especially harmful does the closed shop become, in the opinion of 
its opponents, when a. union requires foremen to obey its rules and 
to serve the union rather than the employers. All closed-shop 
unions, it is represented, "define the workman's rights but say 
nothing of his duties. They destroy shop discipline and put nothing 
in its place." 

To these indictments the advocates of the closed shop have made 
vigorous rejoinder. They assert that while the unions do not allow 
employers to "victimize" their members, they do not interfere o1;her- 
wise with the "right to hire and discharge" as long as all persons 
who are hired become union members. It is also flatly denied that 
the minimum wage is usually the maximum., and that production 
is restricted in closed shops. 

The reconciliation of these conflicting statements of facts is 
possible. The opponents of the closed shop in discussing its economic 
efl'ects always assume that the closed shop is everywhere the same, 
and take as typical those unions in which the restrictions on employ- 
ment are most severe. The advocates of the closed shop assume as 
typical those unions in which the restrictions are mildest. It will 
be noted that in this respect the unions vary widel}^ In the majority 
of closed-shop unions, however, the employer is allowed to hire non- 
unionists when competent unionists are not available, or even in 
many unions when they are available. It is also customary to allow 
such non-unionists to work a certain period in a shop before being 
required to join the union. There is little basis for the claim, there- 
fore, that employers are restricted to hiring union men only. It is 
true that "scabs" and members of rival unions are rarely allowed to 
work. "Scabs," however, form but a small part of the men in any 
trade, and agreements between rival unions have now to some extent 
solved the problem of jurisdictional disputes. 

If the union itself is closed, union employers have no means of 
obtaining additional help when their business increases. The closed 
union, however, although it is usually found with the closed shop, is 
not identical with it. To say that no more members shall be admitted 
to a union is an entirely diflferent thing from saying that union men 
shall not work with non-unionists. 

All unions that have advanced beyond the most rudimentary 
stage enforce a minimum wage. The tendency to uniformity and a 
"dead level" growing out of the existence of the minimum wage can 
only be connected with the closed shop through some restriction on 
the right to hire and discharge. If the union has a compulsory wait- 
ing list, it is easy to see how the minimum wage may become the 
maximum wage. However, compulsory waiting lists are established 



TRADE UNIONISM 6ii 

in very few unions. Similarly, restriction of output is connected 
with the closed shop only through the waiting list'. A great part of 
closed-shop unions do not have waiting lists. 

It is also charged that the joint and extended closed shops lead 
to demands upon employers. When satisfactory conditions have 
been obtained in one trade, the men may be called out on strike be- 
cause "unfair" material is used, or because the open shop exists in 
•an allied trade. Grievances "manufactured outside the shop" are 
thus said to be constantly arising. Complaint is also made that the 
closed shop is responsible for many unnecessary shop rules which 
virtually deprive the employer of control over his business. One 
writer has gone so far as to say that "the amount of restriction which 
it may be expected to find in 'closed shops' will certainly amount to 
one-third of what the output should amount to." Statements have 
frequently been made that the open shop has brought business pros- 
perity to different communities. 

Taking up the last of these contentions first, the unions allege 
that closed-shop agreements are of distinct advantage to employers. 
In open shops of most trades the employer is said to be constantly 
harassed with complaints from individuals. In closed shops all 
grievances must first be referred to the union, which acts upon many 
of them unfavorably. It is equally undeniable that most unions 
which have opportunity to enforce the extended or the joint closed 
shop have not hesitated at times to strike even when all their de- 
mands in the particular shop have been satisfied. 

The unions have also denied in a general way that their shop 
rules have been unduly restrictive. As a matter of fact, the great 
open-shop movement which began in 1901 was caused primarily by 
the rapid increase in rules regulating the number of apprentices, the 
kind of machinery that should be used, the methods of shop manage- 
ment, and the like. The connection between the closed shop and 
arbitrary shop rules is close, but the two are not identical. Arbitrary 
rules can rarely be enforced except in closed shops. If the union 
is strong enough to secure the one, it can, if it sees fit, enforce the 
other. Obviously, however, a closed-shop union need not, and 
many of them do not, have hurtful shop rules. 

The defenders of the closed shop have tried to show that the 
closed shop is an advantage to an employer. In the first place, they 
claim that the closed shop protects fair-minded employers from 
"cut-throat competition." If an industry is thoroughly unionized, 
every manufacturer or contractor can tell precisely what his com- 
petitors are paying in wages. As wages form the largest item in the 



6i2 CURRENT ECONOMIC PROBLEMS 

average employer's expense account, it therefore becomes possible 
for him to "figure intelligently on his work," something which he 
"could never feel certain of were the open shop to pervail." The 
same shop rules also apply in all union establishments. Under the 
open shop not nearly the same uniformity in competitive conditions 
can be secured. The closed shop is a device absolutely essential to 
the rigid and wide enforcement of union rules. 

Secondly, those who uphold the closed shop affirm that it tends 
to create a greater esprit de corps among the men than the open 
shop does. Union and non-union men represent two diametrically 
opposed ideas. The first stand for collective, the second for indi- 
vidual action. Consequently, there is constant conflict between the 
two in the endeavor to obtain control over a shop. Because his men 
do not co-operate, the employer is likely to lose money. Therefore 
as a business necessity open shops must become either union or non- 
union. That there should be ill-feeling between union and non- 
union men is easily understood when we consider why unions desire 
the closed shop. Non-union men are the economic enemies of 
unionists as long as employers resort to individual bargaining or 
express a dislike for full union control. In particular, efforts are 
put forth to make the employment of "scabs" unprofitable. 

Finally, unionists say that the closed shop is advantageous to 
employers because in many unions it carries with it the privilege of 
using a label that has a distinct market value. No union soMcits 
work for an open shop. A label, however, is an advantage to an 
employer only under certain conditions. It can be used to best 
advantage on articles largely purchased by the laboring classes. That 
a label increases sales on such goods is evidenced by the fact that 
manufacturers, solely for the purpose of obtaining the use of the 
label, have often asked that their establishments be unionized. The 
labor journals not infrequently contain statements from employers 
that the closed shop is a "good business proposition." But the label 
rarely efifects an increase in the demand for expensive goods or for 
articles sold to women. It is evident, therefore, that the number of 
employers who can find an advantage in the use of the labels is small 
relative to the total number of employers. 

To sum up the arguments against the closed shop on the ground 
that it affects unfavorably the economic conduct of industry, it may 
be said that the crux of the question is whether or not the "right to 
hire and discharge" is unduly restricted under the closed shop. The 
employer may enjoy the use of a valuable label and may be placed 
on a "fair competitive basis" with other employers. Individually the 
employer may reap a gain. But in the long run industry will be 



TRADE UNIONISM 613 

carried on less efficiently if by waiting lists or other restrictive 
devices the union interferes with the employer's hiring and discharg- 
ing his working force in accordance with his best judgment. 

296. The Ethics of the Closed Shop" 

BY jame;s h. tufts 

In certain industries in which the workmen are well organized 
they have made contracts with employers which provide that only 
union men shall be employed. The psychological motive for the de- 
mand for the closed shop is natural enough ; the union has succeeded 
in gaining certain advantages in hours or wages or both; this has 
required some expense and perhaps some risk. It is natural to 
feel that those who get the advantage should share the expense and 
effort, and failing this, should not be admitted to the shop. If the 
argument stopped here it would be insufficient for a moral justifica- 
tion for two reasons. First, joining a union involves much more 
than payment of dues. It means control by the union in ways which 
may interfere with obligations to family, or even to the social order. 
Hence, to exclude a fellow workman from the opportunity to work 
because he — perhaps for conscientious reasons — would not belong to 
the union, could not be justified unless the union could make it ap- 
pear that it was maintaining a social and not merely a group inter- 
est. Second, in some cases unions have sought to limit output. In 
so far as thjs is done, not for reasons of health, but to raise prices, 
the union is opposing the interest of consumers. Here again the 
union must exhibit a social justification if it is to gain social approval. 

On the other hand, it may be noted that the individualist who 
believes in the competitive struggle as a moral process has no ground 
on which to declare for "open shop." Exactly the same principle 
which would permit combination in capital and place no limit on 
competitive pressure, provided it is all done through free contracts, 
can raise no objection against combinations of laborers making the 
best contracts possible. When a syndicate of capitalists has made 
a highly favorable contract or successfully underwritten a large 
issue of stock, it is not customary under the principle of "open 
shop" to give a share in the contract to all who ask for it, or to let 
the whole public in "on the ground floor." Nor are capitalists ac- 
customed to leave a part of the market to be supplied by some com- 
petitor for fear such competitor may suffer if he does not have 

"Adapted from Ethics, hy lohn Dewey and James' H. Tufts, pp. 559-561. 
Copyright by Henry Holt & Co. (1909). 



6 14 CURRENT ECONOMIC PROBLEMS 

business. When the capitaHst argues for the open shop upon the 
ground of freedom and democracy, it seems Hke the case of the 
mote and the beam. 

An analogy with a poHtical problem may aid : Has a nation the 
right to exclude (or tax heavily) goods or persons from other coun- 
tries ? May it maintain a "closed shop" ? The policy of the Amer- 
ican colonists and of the United States has varied. The Puritans 
maintained a "closed shop" on religious lines. They came to this 
country to maintain a certain religion and polity. They expelled 
several men who did not agree with them. The United States ex- 
cludes Chinese laborers, and imposes a tariff which in many cases 
is intended to be prohibitive against the products of other countries. 
This is done avowedly to protect the laborer, and in so far as it is 
effective it closes the shop. The maxim, "This is a white man's 
country," is a similar "closed shop" utterance. On moral grounds 
the non-union man is in the same category as the man of alien race 
or country. What, if anything, can justify a nation or group from 
excluding others from its benefits? Clearly the only conditions are 
(i) that the group or nation is existing for some morally justifiable 
end, which (2) would be endangered by the admission of the out- 
siders. A colony established to work out religious or political lib- 
erty would be justified in excluding a multitude who sought to en- 
ter it and then subvert these principles. If a union is working for a 
morally valuable end, e. g., a certain standard of living which is 
morally desirable, and if this were threatened by the admission of 
non-union men, the closed shop would seem to be justified. If the 
purpose were merely to secure certain advantages to a small group, 
and if the open shop would not lower the standard but merely extend 
its range of benefits, it is hard to see why the closed shop is not a 
selfish principle — though no more selfish than the grounds on which 
the tariff is usually advocated. 

E. THE WEAPONS OF INDUSTRIAL CONFLICT 
297. The Function of the Strike in Collective Bargainings^ 

BY JOHN MITCHELL 

The normal condition of industry is peace. The average work- 
ingman, engaged in industries in which strikes occur, loses less than 
a day a year in this manner. A strike lasts upon the average about 
twenty-three days, but the average employer carries on his business 

"Adapted from Organised Labor, 299-306. Copyright by the American 
Book and Bible House (1903). 



TRADE UNIONISM 615 

for thirty years without a strike. The average lockout lasts ninety- 
seven days, but of a thousand establishments, less than two declare 
a lockout in the course of a year. 

A strike is simply a method of bargaining. If the grocers of a 
city would refuse to sell their sugar for less than seven cents a 
pound and the customers would refuse to pay more than six, exactly 
the same thing would occur as happens in an ordinary strike. A 
strike does not necessarily involve any form of bitterness ; it merely 
represents a difference between what the buyer of labor is willing 
to offer, and what the seller of labor is willing to accept. Until the 
buyer and seller of an ordinary commodity agree as to price and 
conditions no sale can be effected. Until the wages and conditions 
of work are agreed upon and acceded to by both employer and 
workman, the industry must stop. 

Strikes thus result from a failure to make a bargain or contract 
by men who are free to contract. Strikes cannot exist before free- 
dom of contract is accorded. The present conception of a strike is 
that of workmen and employers exercising their undoubted right to 
refuse to enter into contracts where the conditions are not satis- 
factory to them. 

It is frequently stated that trade unions desire strikes because 
they are organized for that purpose. This is not true. The trade 
union is organized for the purpose of securing better conditions of 
life and labor for its members, and, when necessary, a strike is re- 
sorted to as a means to that end. The same conditions which cause 
the creation of trade unions are equally answerable for the constant 
demand for improved conditions for the working class, which 
demand frequently voices itself in strikes. 

Strikes are to be avoided in all cases where the object desired can 
be obtained by peaceful negotiation. There is nothing immoral, 
however, in the workingman's striking, just as there is nothing im- 
moral in his wanting higher 'wages. 

298. The Utility of the Strike^^ 

BY I^RANK JULIAN WARNE 

A Strike is simply a piece of industrial machinery, if it may be so 
termed, which the organization of the Trade Union provides for 
the attainment of well-defined and laudable objects. Its operation 
does not necessarily mean the violation of law, or the destruction 

^"Adapted from The Coal-Mine Workers, 154-158. Copyright by Long- 
mans, Green, & Co. (1905). 



6i6 CURRENT ECONOMIC PROBLEMS 

of property, or the taking of human life. All these, where in evi- 
dence, are unforeseen incidents to the conduct of a great strike for 
any long period, and are the manifestations of aroused human 
passion and class hatred. No one would question the use of a 
revolver in the hands of a husband defending his wife and children 
and home from the violation of its sanctity by outlaws, but most of 
us would condemn the employment of the same weapon in the hands 
of the outlaws for the accompHshment of their designs. And yet 
the weapon in both cases is a revolver. So it is with the Strike ; it 
is simply a weapon for the attaining of certain well-defined ends. 
In the hands of men defending their Standard of Living from the 
cupidity and inhumanity of particular members of the employing 
class, the Strike is of the very greatest social value. But like the 
revolver, it can be misused, as in the case of self-seeking individuals 
masquerading under trade-union principles, but because of that 
misuse the weapon should not be condemned. It is no more possible 
for the Trade Union to prevent the Strike from falling into the 
hands of those who misuse it, than it is for the Law to prevent 
revolvers from coming into the possession of outlaws. The Strike 
has performed and will continue to perform a most useful function 
in the progress of the trade-union movement, and consequently in 
the onward march of American civilization. 

It is true that the course of the labor movement has been marked 
by the taking of human life and the destruction of property, just as 
has been the case in the creation of the State and the establishment 
of the Church. The why and the wherefore are easily to be ex- 
plained in the theory of the adjustment of the principles of new 
institutions to those created for society by older estabHshed ones. 
This is not said as an apology for the taking of human life in strikes. 
No one regrets this manifestation of the progress of the Trade 
Union more than does the writer, and -yet if he had to choose be- 
tween preserving the lives that have been so lost and retaining the 
Trade Union as an institution, it would not be in favor of the 
former. This decision would be made in the firm belief that in the 
attainment of its objects — in throwing more safeguards around the 
workingman, especially in hazardous employments; in securing 
better sanitary arrangements in factories and mills, in preventing 
the employment of children at tender ages, in securing higher wages, 
in reducing the hours of employment, in raising the Standard of 
Living, and in innumerable other ways — in these directions the 
Trade Union is saving for society more lives than have been taken 
in all the industrial conflicts of which history gives any record. 



TRADE UNIONISM 617 

The Strike justifies itself either as a weapon of ofifense or defense 
in the protection, as a last recourse, of the Standard of Living of the 
American workingman. It is, economically, simply the refusal of a 
number of workingmen, usually organized in an association, to sell 
their labor for less than a stipulated price or to work under other 
than specified conditions of employment, coupled with the refusal 
of the purchaser of that labor — the employer — to accede to the 
demands. 



299. The Striker and the Worker" 

BY SOLON LAUER 

I am perfectly willing that you should quit your job, whenever 
you do not like it. You may quit individually, or you may all quit 
by agreement. It may cause your employers and us, the public, much 
inconvenience and expense; but I do not see how we can refuse 
you that right if you choose to exercise it. 

But there your rights cease. If, now, your employers can find 
other men to take your places, why shall they not do so ? Have not 
these men as good a right to work as you have to refuse to work? 
And will you march upon them with stones and clubs, and assault 
them with dynamite, in order that you may carry your point with 
your employers ? When you play the Dog in the Manger, my broth- 
ers, there is nothing for it but to beat you into submission. Eternal 
Justice, seated calm and impassive above all our petty quarrels, de- 
mands it. If the machinery of Justice be not wholly wrecked and 
ruined here below, it must be set in motion against your selfish plot. 

This is not my affair. I can get on without your cars. Legs 
were before electrics. If there were nothing but my interests in- 
volved, or those of my neighbors, you and your employer should sit 
growling at one another, or fly at each other's throat, until one or 
other were wholly vanquished and demolished. But there are the 
Rights of Man to be considered; yea, the Rights of the Working- 
man, which ought to be most dear to your hearts. You do not want 
these jobs on the present terms. These men do want them, having 
until now none at all, or worse ones. Shall their rights be ignored 
and violated, that you, may carry your point? 

"From Social Laws, 189-190. Published by the Nike Publishing Co. 
(1901). 



6i8 CURRENT ECONOMIC PROBLEMS 

300. Wanted — Jobs Breaking Strikes^^ 

We break strikes— also handle labor troubles in all their phases. 
We are prepared to place secret operatives who are skilled mechan- 
ics in any shop, mill or factory, to discover whether organization is 
being done, material wasted or stolen, negligence on the part of em- 
ployees, etc., etc We guard property during strikes, 

employ non-union men to fill places of strikers, fit up and maintain 
boarding-houses for them, etc. Branches in all parts of the coun- 
try. Write us for references and terms. The Joy Detective Agency, 
Incorporated, Cleveland, Ohio. 

301. The Efficacy of Secret Service^^ 

Secret service properly applied with the right men correctly 
placed can be made extremely profitable when conditions are studied 
and co-operation given. Such service is our specialty, and for that 
reason "we maintain pracUcal men of all trades and occupations, both 
union and non-union. In their daily reports they suggest improve- 
ments and new ideas ; also detail the agitating, dishonest, non-pro- 
ducing, and retarding conditions. 

Our operative, when engaged by you, is, to everyone but your- 
self, merely an employee in your establishment, and whatever he 
receives as wages is credited as part payment for his detective serv- 
ice. Daily typewritten reports are mailed to our clients. These 
operatives are continually under direct supervision of the manage- 
ment of this agency. 

Within the heart of your business is where we operate, down in 
the dark corners, and in out-of-the-way places that cannot be seen 
from your office or through your superintendent or foreman. 

If it is of interest to you to know today what occurred in your 
plant yesterday, and be in a position to correct these faults tomor- 
row, we would be pleased to take the matter up with you further, and 
respectfully ask an interview for one of our representatives. 

302. The Boycott of the Butterick Company'" 

BY A. J. PORTENAR 

It was my fortune to take a very active part in the boycott insti- 
tuted against the products of the Butterick Company 'by Typographi- 

^^Adapted from an advertisement appearing in American Industries, 
August 15, 1907. 

^^This letter is alleged to have been sent out by the William J. Burns 
Detective Agency. Quoted from Laidler, Boycotts and the Labor Struggle, 
295. 

-"Adapted from Organized Labor, 90-92. Copyright by the Macmillan 
Company (1912). 



TRADE UNIONISM 619 

cal Union No. 6 in 1906, and later carried on by the International 
Typographical Union. This boycott was, I verily believe, better 
organized, more determined, and more damaging to the parties it 
was aimed at than any other I have knowledge of, not excepting that 
against the Buck Stove and Range Company, which is more widely 
known only because of the adventitious circumstances that brought 
the highest officials of the American Federation of Labor into 
court. Not only in the United States and Canada, but in Cuba, 
Germany, and Australia, the International Typographical Union cut 
into the sales and captured the customers of the Butterick Company. 
Wherever a typographical union was organized, there, in greater 
or less degree, the boycott was pushed. The expected court pro- 
ceedings were in evidence at all times. There were arrests, injunc- 
tions, actions for criminal contempt. In short I doubt if a more 
thorough trial of the efficiency of the boycott has ever been made. 

Now what about results? That the Butterick people were con- 
siderably damaged they themselves admitted. Eventually the But- 
terick house was unionized again, but it is not possible for us to say 
to what extent the boycott was responsible for that consummation. 
It is within my knowledge, however, that it had been decreasing in 
intensity for two years before -an agreement with the company was 
reached, in 191 1, and that at the time of settlement the boycott was 
practically dormant. 

I was very active in this matter, and from the experience thus 
gained T have reached definite conclusions. We expended a large 
amount of money; how large I do not know. There was a con- 
tinuous distribution of printed matter and of comparatively expen- 
sive novelties bearing appropriate inscriptions. There were speakers 
sent to tour the country. There was an organizer whose sole duty 
it was to further the boycott. There was a prominent lawyer 
engaged by the year. So far as money could compass our object, 
we were not niggardly. But money is only one of the essential 
factors a union needs in the conduct of an affair of this kind. Far 
more than money, it must have the enthusiastic devotion of its 
members to the continuous, laborious, and unpleasant work needful 
to make the expenditure of money effective. This, with a few 
exceptions, I found it impossible to get. And even these few, in the 
course of time, finding themselves unsupported by the great majority, 
began to get lukewarm, and at last ceased to labor in a field, so vast 
and so deserted. It was not that we had no success; the Butterick 
Company is the best witness to the contrary. But it is scarcely 
believable how unremittingly we had to labor to save what we had 



620 CURRENT ECONOMIC PROBLEMS 

done one day from becoming useless the next. And this fact eventu- 
ally led to the abandonment of the boycott and the slow recovery 
by the Butterick Company of the ground it had lost. Therefore my 
opinion is that no boycott can completely and permanently accom- 
plish the result .sought, and very few will do nearly so much in that 
direction as the one here spoken of, which finally became a failure. 

303. Ostracism as an Industrial Weapon^^ 

BY FRANK JULIAN WARNS 

In controlling the ordinary supply of labor in the industry, com- 
mittees of union m.en visit personally every man employed who has 
not already been captured by the organizers, and his position is 
definitely ascertained. This is one of the most important uses of 
picketing, by means of which men are met on their way to and from 
work. To the employees continuing at work the pickets at first have 
recourse to the powers of friendly and peaceable persuasion, but if 
these fail to induce the men to join the union, or, if not this, at 
least to remain away from work, then upon the non-union men are 
brought to bear social forces verging upon lawlessness, and over- 
stepping the safeguards the State has thrown around individual 
liberty, which only a strong public sympathy with the cause of the 
union will support. The most important of these social forces is 
ostracism. 

Ostracism is a stronger social force in maintaining a high stand- 
ard of personal conduct than most of us realize. It means banish- 
ment or exclusion from social intercourse or favor, and is usually 
employed by a particular group against members of its own class or 
craft. Its most effective weapon is some term of reproach coined for 
the purpose. Lawyers, for example, who do not come up to the 
standard set for that profession by its dominant group, are ostracised 
and termed "shysters." So it is with the medical profession : physi- 
cians engaged in questionable practices which the dominant group 
denounce are ostracised by the more reputable practitioners with the 
reproachful term "quack." The same social force is at work among 
the industrial classes. Union men set a standard as to wages and 
conditions of employment in a particular industry, and those work- 
ingmen who fall below that measurement, in offering their labor for 
a less price, are ostracised and denounced as "scabs." Whether the 
group be doctors or lawyers or workingmen, whatever it adopts as 

"^Adapted from The Coal-Mine Workers, 160-165. Copyright by Long- 
mans, Green, & Co. (1905). 



TRADE UNIONISM 621 

the standard of measuring conduct along particular lines is sooner 
or later taken up by the broader social grouping in the community 
and accepted as its standard of judgment. This is particularly and 
strikingly true of a community closely identified with an industry the 
livelihood of whose members depends upon the industry's activities 
and in which a dominant group (usually members of a Trade Union) 
creates the industrial standard. This explains the attitude of hos- 
tility an industrial community exercises towards the "scab." It ex- 
plains, also, perhaps, how men far removed from the influence of 
the working classes can look upon the "scab" as a hero. 

The social force of ostracism, put into operation by the working 
of the Trade Union, is directed, and particularly so in strike times, 
not only against the "scab" himself, but also along all those channels 
of social relations affecting him and which might have influence 
upon him in bringing about action conformable to the standard of 
the dominant group. The strength of this weapon in the strike of 
the anthracite-mine employees in 1902 caused union men and their 
families to refuse to associate with the workingman who continued 
his employment in the mines ; it expelled a prominent and other- 
wise highly respected citizen from a benevolent society which had 
for its object the assisting of sick members and the defraying of a 
part of the funeral expenses of those who died, and of which he had 
been a member in good standing for more than twenty-seven years ; 
it caused children of striking mine workers not only to refuse to 
attend the school of a woman teacher whose aged father was a 
watchman at one of the mines, but they also demanded that she be 
discharged. Children of union miners would not attend Sunday- 
school with their former playmates whose ' relatives continued at 
work; members of the Lacemakers' Union employed at a silk-mill 
refused to work alongside girls whose fathers and brothers would 
not strike; clerks were dismissed from stores and business estab- 
lishments because they were related to men who continued at work 
in the mines; even promises of marriage were broken through rela- 
tives of one or the other of the contracting parties being non-union 
workers. The "scab" was not infrequently held up to public scorn 
and ridicule by the publication of his name in the "unfair list" of 
the newspapers in the mining towns as being "unfit to associate with 
honorable men ;" he was represented by name on signs attached to 
effigies dangling from electric-light, telegraph, and telephone poles 
and wires and from trees in front of his home and along the high- 
ways and streets ; a grave in his yard with his name placed upon the 
board at the head to represent a tombstone not infrequently con- 
fronted him ; the sign of "the skull and cross-bones" was painted on 



62 2 CURRENT ECONOMIC PROBLEMS 

his house, and in innumerable other ways, conceivable only by work- 
ingmen whose imaginative faculties have been aroused by the desire 
for persecution of others who oppose a cause which is so vital to 
their home and family, was created a public sentiment against the 
non-union employee. 

304. The Scab" 

BY DYER D. IvUM 

The non-unionist is but an indirect enemy; in withholding his 
aid he by so much weakens the common line of defense. Though 
often his acts may directly, without conscious effort, aid the enemy, 
he need not be a traitor to his fellow toilers. Every great move- 
ment has some object of superlative loathing; its Judas Iscariots, 
its Benedict Arnolds, its Pigotts, its paid spies and informers, its 
Pinkerton thugs — men deaf to all honor, blind to mutual interest, 
dead to all but the miserable cravings of their shriveled souls. In 
the industrial conflict the instinct of workers has significantly termed 
its type of this species "scab !" Loud have been the appeals for sym- 
pathy with the workman who falls out from the line to better his con- 
dition, or relieve the distress of a starving wife and family. But 
to prevent just such contingencies is the mission of the union. One 
who is forced to the necessity of wage labor and refuses to share 
the common danger, but either openly or stealthily goes over to the 
enemy to accept his terms, is a deserter. By his act he has sundered 
the social bonds of mutual interest which united him to us, has 
served notice that he asks no aid, expects no sympathy, seeks no 
quarter. At his acted word we take him. 

The time has passed for circumlocution in handling this subject. 
If Trade-Unionism has a logical ground for existence, if organized 
resistance is preferable to slavish submission, if the social ties which 
unite us in mutual alliance are of higher validity than the selfish 
cravings of an unsocial nature, the relation between the Trade- 
Union and its psycophantic enemy, the "scab," is that existing be- 
tween the patriot and the paid informer. No sentimentalism will 
attenuate, no olive branch will be extended; no tears will be shed 
over whatever misfortune befalls him, nor aught but utter loathing 
be felt for him. He stands forth by his own act recreant to duty. 
He is bankrupt in honor, infidel to faith, destitute of social sym- 
pathy, and a self -elected target. We here but express clearly what 
workingmen feel in every industrial crisis, and we deliberately ex- 
press it that at all times such men be regarded as possible "inform- 
ers" and traitors. 

^^Adapted from Philosophy of Trade Unions, 13-14- Published by 
American Federation of Labor (1892). 



TRADE UNIONISM 623 

But let us hear his defense. We are told that Trade-Unionism 
is an encroachment upon individual right, that the toiler, whether 
union or non-union, has the privilege to sell his labor as best suits 
himself. To this we reply : ( i ) The toiler does not enter the 
market under equal conditions. (2) Monopoly over land, the 
source of wealth, and over exchange, its medium of distribution, 
gives to the capitalist an economic advantage in the struggle. (3) 
The legalization of privilege forces upon the unprivileged the neces- 
sity of combination in order to sustain themselves. (4) The logic 
of events has settled the line of action ; it lies neither in the prayer- 
meeting nor in the polling-booth, but in mutual accord of action and 
determined self-help. 

Industrial combination, under such circumstances, is as neces- 
sary for the exploited toiler, as military organization for an invaded 
people. We are in a state of industrial war. Every appeal to legis- 
lation to do aught but undo is as futile as sending a flag of truce to 
the enemy for munitions of war. The growth of solidarity evi- 
denced in wider federation, in leading to broader views of the issue, 
and deeper sense of interrelations, can but intensify this feeling to- 
ward the "scab." 

Unions have already demonstrated their power to rise above the 
subsistence level, where otherwise they would be. It is our duty, 
not only to ourselves, but to our families, to enlarge the scope of 
union among our fellow craftsmen. Our task is to be true to the 
need of the hour in order to be the better fitted for the unknown 
needs of the struggle tomorrow. The lines are being closer drawn, 
and the exigencies of the situation demand concert of action, both 
against the combined enemy and the traitor who would betray our 
cause by a shot from the rear. In such a struggle for a higher 
civilization — a struggle forced upon us — the industrial recreant is 
a social traitor. 

Out of conflict all progress has come. The history of the Labor 
Movement, its increasing self-reliance, its growing indifference to 
"labor politicians," its development of sturdy independence and 
manhood, all alike indicate change in its methods among future pos- 
sibilities. But with all this, and its accompanying wider sympathy 
and extension of mutual ties, the feeling of loathing toward the 
"scab" has intensified. 

To sum up, to assert egoism against mutual interests is unsocial 
and hence a denial of the mutual basis upon which equitable rela- 
tions alone can exist. Thus the "scab" is not merely unsocial, but by 
his acted word virtually places himself with the industrial invaders 



624 CURRENT ECONOMIC PROBLEMS 

and becomes an enemy. Equal freedom cannot be strained to mean 
a denial of mutual interests. Social evolution is not a mere theory, 
but a record of facts, and no fact is more strongly brought out than 
that progress has resulted only in so far as mutual interests have 
been recognized. We do not institute them, they compel us. 

Therefore, primarily as human beings, become so by social evo- 
lution, and by the social environment in which the present struggle 
is conditioned, and recognizing as the goal of industrial advance the 
mutuality of interests involved in the assertion of equal freedom, in 
strict accord with all sociological deductions, and with the utmost 
submission to the higher law permeating social growth, we rever- 
ently raise our hats to say prayerfully : "To hell with the 'scab' !" 

F. SCIENTIFIC MANAGEMENT AND UNIONISM 
305. Labor and Efficiency^^ 

BY FREDERICK W. TAYEOR 

It is safe to say that no system or scheme of management should 
be considered which does not in the long run give satisfaction to 
both employer and employee, which does not make it apparent that 
their best interests are mutual, and which does not bring about such 
thorough and hearty co-operation that they can pull together instead 
of apart. It cannot be said that this condition has as yet been at all 
generally recognized as the necessary foundation for good manage- 
ment. On the contrary, it is still quite generally regarded as a fact 
by both sides that in many of the most vital matters the best in- 
terests of employers are necessarily opposed to those of the men. In 
fact, the two elements which we will all agree are most wanted on 
the one hand by the men and on the other hand by the employers 
are generally looked upon as antagonistic. 

What the workmen want from their employers beyond anything 
else is high wages, and what employers want from their workmen 
most of all is a low labor cost of manufacture. 

These two conditions are not diametrically opposed to one an- 
other as would appear at first glance; on the contrary, they can be 
made to go together in all classes of work, without exception, and 
in the writer's judgment the existence or absence of these two ele- 
ments forms the best index to either good or bad management. 

The only condition which contains the elements of stability and 
permanent satisfaction is that in which both employer and employees 

"^Adapted from "Shop Management," in the Transactions of the Society 
of Mechanical Engineers, XXIV, 1343-1347 (1903). 



TRADE UNIONISM 625 

are doing as well or better than their competitors are likely to do, 
and this in nine cases out of ten means high wages and low labor 
cost, and both parties should be equally anxious for these condi- 
tions to prevail. With them the employer can hold his own with 
the competitors at all times and secure sufficient work to keep his 
men busy even in dull times. Without them both parties may do 
well enough in busy times, but both parties are likely to suffer when 
work becomes scarce. 

The possibility of coupling high wages with a low labor cost rests 
mainly upon the enormous difference between the amount of work 
which a first-class man can do under favorable circumstances and 
the work which is actually done by the average man. 

That there is a difference between the average and first-class man 
is known to all employers, but that the first-class man can do in 
most cases two to four times as much as is done on an average is 
known to but few, and is fully realized only ' by those who have 
made a thorough and scientific study of the possibilities of men. 

The writer has found this enormous difference between the 
first-class and average man to exist in all of the trades and branches 
of labor which he has investigated, and this covers a large field, as 
he, together with several of his friends, has been engaged with more 
than usual opportunities for twenty years past in carefully and sys- 
tematically studying this subject. 

It must be distinctly understood that in referring to the possi- 
bilities of a first-class man the writer does not mean what he can 
do when on a spurt or when he is overexerting himself, but what a 
good man can keep up for a long term of years without injury to 
his health, and become happier and thrive under. 

The second and equally interesting fact upon which the possi- 
bility of coupling high wages with low labor cost rests, is that first- 
class men are not only willing but glad to work at their maximum 
speed, providing they are paid from 30 to 100 per cent more than 
the average of their trade. 

The exact percentage by which the wages must be increased in 
order to make them work to their maximum is not a subject to be 
theorized over, settled by boards of directors sitting in solemn con- 
clave, nor voted upon by trade unions. It is a fact inherent in 
human nature and has only been determined through the slow and 
difficult process of trial and error. 

The writer has found, for example, after making many mistakes 
above and below the proper mark, that to get the maximum output 
for ordinary shop work requiring neither especial brains, very close 
application, skill, nor extra hard work, such, for instance, as the 



626 CURRENT ECONOMIC PROBLEMS 

more ordinary kinds of routine machine-shop work, it is necessary 
to pay about 30 per cent more than the average. For ordinary day 
labor requiring little brains or special skill, but calling for strength, 
severe bodily exertion and fatigue, it is necessary to pay from 50 
to 60 per cent above the average. For work requiring special skill 
or brains, coupled with close application but without severe bodily 
exertion, such as the more difficult and delicate machinist's work, 
from 70 per cent to 80 per cent beyond the average. And for work 
requiring skill, brains, close application, strength, and severe bodily 
exertion, such, for instance, as that involved in running a well-run 
steam hammer doing miscellaneous work, from 80 per cent to 100 
per cent beyond the average. Men will not work at their best unless 
assured a good liberal increase, which must be permanent. 

It is the writer's judgment, on the other hand, that for their 
own good it is as important that workmen should not be very much 
overpaid, as that they should not be underpaid. If overpaid, many 
will work irregularly and tend to become more or less shiftless, ex- 
travagant, and dissipated. It does not do for most men to get rich 
too fast. The writer's observation, however, would lead him to the 
conclusion that most men tend to become more instead of less 
thrifty when they receive the proper increase for an extra hard 
day's work, as, for example, the percentages of increase referred to 
above. They live rather better, begin to save money, become more 
sober, and work more steadily. And this certainly forms one of the 
strongest reasons for advocating this type of management. 

306. The Nature of Scientific Management"* 

BY MAURICE Iv. COOKE 

What we want in any industrial establishment, if we are to reach 
the highest point in productivity, is to have every individual use his 
highest powers to the best advantage. This is the final goal of 
scientific management. It is the goal both for the individual and for 
society. If you can picture a society in which every unit is using 
his highest faculties to the best advantage, you will see that it ap- 
proximates the millennium. 

The moment you adopt this as a standard, however, you must 
frame your organization so that every employee, from the humblest 
to the highest, is given a chance to exercise his highest powers to 
the best advantage. He must not only not be hindered, but he must 

^^Adapted from "The Spirit and Social Significance of Scientific Man- 
agement," in the Journal of Political Economy, XXI, 485-487 (1913). 



TRADE UNIONISM 627 

be helped, and helped to the extent of pointing out and developing 
faculties and powers of which he may have been unaware. Under 
scientific management we think that we are learning how to do this. 
Alfred Marshall has called attention to the fact that perhaps half 
the brains of the world are in the so-called working classes and that 
"of this a great part is fruitless for want of opportunity." Under 
the new methods this great storehouse of wealth will be tapped, not 
we hope for the benefit of the few, but for the benefit of all. 

To define scientific management is no easy task. Hugo Diemer 
says that Mr. Taylor 

considers a manufacturing establishment just as one would an intricate 
machine. He analyzes each process into its ultimate simple elements and 
compares each of these simplest steps or processes with an ideal or perfect 
condition. He then makes all due allowance for rational and practical con- 
ditions and establishes an attainable commercial standard for every step. The 
next process is that of attaining, continuously, the standard, involving both 
quality and interlocking, or assembling, of all these primal elements into a 
well-arranged, well-built, smooth-running machine. 

Mr. Taylor says that the philosophy of scientific management is 
embraced under these four principles : 

1. The development of a science in place of "rule of thumb" for each 
element of the work. 

2. The scientific selection and training of the workman. 

3. The bringing of the science and the scientifically trained workman 
together through the co-operation of the management with the man. 

4. An almost equal division of the work and the responsibility between 
the management and the workmen, the management taking over all work for 
which they are better fitted than the workmen, while in the past almost all 
of the work, and the greater part of the responsibility, were thrown upon 
the workman. 

Quite informally, scientific management may be thus defined : 

1. It is a definite working policy applicable wherever human 
effort is put forth. 

2. It is the introduction of the laboratory method in everyday 
affairs. 

3. It is the acceptance of the dictates of science instead of those 
of personal opinion and tradition. 

4. It is the establishment of the fact that not to know is no 
crime — that the crime is not being willing to find out. 

5. It is a type of co-operation more intensive than the world 
has yet seen. 

6. It is filling in — not bridging — the chasm between capital and 
labor. 

7. It is making our industrial life square up with the best we 
know in our personal and social relations. 



628 CURRENT ECONOMIC PROBLEMS 

8. It involves a very radical change in the attitude both of the 
men and of the management to the work on which they are mutually 
engaged. 

Practically everything that is done in developing scientific man- 
agement in an estabhshment has for its object the setting of tasks. 
A task is simply a fair day's work and — let us not forget — one that 
can be repeated day in and day out, year in and year out, if neces- 
sary, without detriment to the physical, mental and moral well- 
being of the person performing it. Unless you are able to set tasks 
you cannot have scientific management. 

307. The Attitude of Organized Labor Toward Scientific Man- 
agement^^ 

We are opposed to any system of shop management which 
requires one man to stand over another, timing him with a stop 
watch in order to speed him up beyond his normal capacity. In ad- 
dition to the brutality of such a proceeding, no stop watch time 
study can possibly be accurate. Every physical act performed by 
man is preceded by a mental process. The greater the amount of 
skill required in the work, the greater the mental process preceding 
the physical expression of it, and there is no method known to effi- 
ciency engineers or others by which a time study can be made by a 
stop watch or any other time-measuring device of the mental process 
which precedes the physical act. The mental process being a neces- 
sary part of the work itself, the failure to make a time study of that 
operation of the work makes the study inaccurate, and secondly, 
worthless as a basis for computing compensation. 

To establish a bonus or premium system upon such a time study 
is wrong, induces the workman to toil beyond his normal capacity, 
and the whole system has a tendency to wear the worker to a ner- 
vous wreck, destroy his physical and mental health, and ultimately 
land him as a charge upon the community in some of our eleemosy- 
nary institutions. 

308. Modern Industry and Craft SkilP^ 

The one great asset of the wage worker has been his craftsman- 
ship. We think of craftsmanship ordinarily as the ability to manipu- 
late skilfully the tools and materials of a craft or trade. But true 

^^Adapted from resolutions passed by the National Convention of the 
American Federation of Labor, November 22, 1912: from Report of Pro- 
ceedings, 346. 

^^An editorial with the above caption in the International Moulders' 
lournal, LI, 197-198 (1915). 



TRADE UNIONISM 629 

craftsmanship is much more than this. The really essential element 
in it is not manual skill and dexterity, but something stored up in 
the mind of the worker. This something is partly the intimate 
knowledge of the character and uses of the tools, materials, and 
processes of the craft which tradition and experience have given 
the worker. But beyond this and above this, it is the knowledge 
which enables him to understand and overcome the constantly aris- 
ing difficulties that grow out of variations, not only in tools and 
materials, but in the conditions under which the work must be done. 

In the past for the most part the skilful manipulation of the 
tools and materials of a craft and this craftsmanship of the brain 
have been bound up together in the person of the worker and have 
been his possession. And it is this unique possession of craft know- 
ledge and craft skill on the part of a body of wage workers — that is, 
their possession of these things and the employer's ignorance of 
them — that has enabled the workers to organize and force better 
terms from the employers. On this unique possession has depended 
more than on any other one factor the strength of trade unionism 
and the ability of unions to improve the conditions of their members. 

This being true, it is evident that the greatest blow that could be 
delivered against unionism and the organized workers would be the 
separation of craft knowledge from craft skill. For if the skilled 
use of tools could be secured from workmen apart from the craft 
knowledge which only years of experience can build up, the pro- 
duction of "skilled workmen" from unskilled hands would be a mat- 
ter in almost any craft of but a few days or weeks ; any craft would 
be thrown open to the competition of an almost unlimited labor 
supply ; the craftsmen in it would be practically at the mercy of the 
employer. 

Of late this separation of craft knowledge and craft skill has 
actually taken place in an ever-widening area and with an ever- 
increasing acceleration. Its process is shown in the two main forms 
which it has been taking. The first of these is the introduction of 
machinery and the standardization of tools, machinery, products, 
and process, which make production possible on a large scale and the 
specialization of the workmen. Each workman under such circum- 
stances needs and can exercise only a little craft knowledge and a 
little craft skill. But he is still a craftsman, though only a narrow 
one and subject to much competition from below. The second form, 
more insidious and more dangerous than the first, but to the signifi- 
cance of which most of us have not yet become aroused, is the 
gathering up of all this scattered craft knowledge, systematizing it 
and concentrating it in the hands of the employer, and then doling 



630 CURRENT ECONOMIC PROBLEMS 

it out again in the form of minute instructions, giving to each worker 
only the knowledge needed for the mechanical performance of a par- 
ticular relatively minute task. This process, it is evident, separates 
skill and knowledge even in their narrow relationship. When it is 
completed the worker is no longer a craftsman in any sense, but is 
an animated tool of the management. He has no need of special 
craft knowledge or craft skill, or any power to acquire them if he 
had, and any man who walks the streets is a competitor for his job, 
There is no body of skilled workmen today safe from the one 
or the other of these forces tending to deprive them of their unique 
craft knowledge and skill. Only what may be termed frontier trades 
are dependent now on the all-round craftsman. These trades are 
likely at any time to be standardized and systematized and to fall 
under the influence of this double process of specialization. The 
problem thus raised is the greatest one which organized labor faces. 
For if we do not wish to see the American workmen reduced to a 
great semi-skilled and perhaps little organized mass, a new mode 
of protection must be found for the working conditions and stand- 
ards of living which unionismi has secured, and some means must be 
discovered for giving back to the worker what he is fast losing in 
the narrowing of the skill and the theft of his craft knowledge. It 
is another problem which the organized workmen must solve for 
themselves and society. 

G. UNIONISM AND THE ANTI-TRUST LAWS 
309. The Monopoly of Labor-^ 

To the House of Representatives : 

I return, without my approval, the bill (H. R. 28775,) being 
"An act making appropriations for the sundry civil expenses of the 
Government for the fiscal year ending June 30, 1914, and for other 
purposes." 

My reasons for failing to approve this important appropriation 
bill are found in a provision which has been added to that appropri- 
ating $300,000 for the enforcement of the anti-trust laws in the fol- 
lowing language : 

"Provided, however. That no part of this money shall be spent 
in the prosecution of any organization or individual for entering 
into any combination or agreement having in view the increasing of 
wages, shortening of hours, bettering the condition of labor, or for 

^''Adapted from the President's message of March 3, 1913, vetoing the 
Civil Appropriations Bill. 



TRADE UNIONISM 631 

any act done in furtherance thereof not in itself unlawful : Pro- 
vided, further, That no part of this appropriation shall be expended 
for the prosecution of producers of farm products and associations 
of farmers who co-operate and organize in an effort to and for the 
purpose to obtain and maintain a fair and reasonable price for 
their products." 

This provision is class legislation of the most vicious sort. If it 
were enacted as substantive law and not merely as a qualification 
upon the use of monies appropriated for the enforcement of the law, 
no one, I take it, would doubt its unconstitutionality. A similar pro- 
vision in the laws of the State of Illinois was declared by the Su- 
preme Court to be an invasion of the guarantee of the equal pro- 
tection of the laws contained in the fourteenth amendment of the 
Constitution of the United States, ^^ although the only exception 
in that instance from the illegality of organization and combina- 
tions, etc., declared by that statute, was one which exempted agri- 
culturists and live-stock raisers in respect to their products or live 
stock in hand from the operation of the law leaving them free to 
combine to do that which, if done by others, would be a crime against 
the State. 

The proviso is subtly worded, so as, in a measure, to conceal its 
full effect, by providing that no part of the money appropriated 
shall be spent in the prosecution of any organization or individual 
"for entering into any combination or agreement having in view the 
increasing of wages, shortening of hours, or bettering the condition 
of labor," and so forth. So that any organization formed with the 
beneficent purpose described in the proviso might later engage in a 
conspiracy to destroy by force, violence, or unfair means any em- 
ployer or employee who failed to conform to its requirements ; and 
yet, because of its originally avowed lawful purpose, it would be 
exempt from prosecution, so far as prosecution depended upon the 
money appropriated by this act, no matter how wicked, how cruel, 
how deliberate the acts of which it was guilty. So, too, by the fol- 
lowing sentence in the act such an organization would be protected 
from prosecution "for any act done in furtherance" of the "increas- 
ing of wages, shortening of hours, or bettering the condition of 
labor" not in itself unlawful. But under the law of criminal con- 
spiracy acts lawful in themselves may become the weapons whereby 
an unlawful purpose is carried out and accomplished.^^ 

/'^Connelly v. United Sewer Pipe Co., 184 U. S. 540. 

^^Shawnee Compressed Coal Co. v. Anderson, 209 U.S. 423-434; Aikens v. 
Wisconsin, 19S U.S. 194-206; Swift v. United States, 196 U.S. 375-396; United 
States V. Reading Co., 226 U.S. 324. 



632 CURRENT ECONOMIC PROBLEMS 

An amendment almost in the language of this proviso, so far as 
it refers to organizations for the increasing of wages, etc., was in- 
troduced in the Sixty-first Congress, passed the House, was re- 
jected in the Senate, and after a full discussion in the House, failed 
of enactment. Representative Madison, speaking in favor of the 
amendment which struck out the proviso, characterized it as an at- 
tempt to "write into the law, so far as this particular measure is 
concerned, a legalization of the secondary boycott. The laws of the 
country," he pointed out, "are liberal to the workingman. He can 
strike, he can agree to strike, and he can apply the direct boycott, 
but when it comes to going further and so acting as to impede and 
obstruct the natural and lawful course of trade in this country, then 
the law says he shall stop. And all in the world that this anti-trust 
act does is to apply to him that simple and proper rule, that he, too, 
as well as the creators of trusts and monopolies, shall not obstruct 
the natural and ordinary course of trade in the United States of 
America." "I believe," he added, "in the high aims, motives, and 
patriotism of the American workingman, and do not believe that, 
rightly understanding this amendment, they would ask us to write 
it into the law of this Republic."^" 

It is because I am unwilling to be a party to writing such a pro- 
vision into the laws of this Republic that I am unable to give my 
assent to a bill which contains this provision. 

WlIvUAM H. TaFT 

310. The Charter of Industrial Freedom^^ 

BY SAMUElv GOMPERS 

The Sherman anti-trust law was repeatedly used against organi- 
zations of workers on the ground that they were combinations in 
illegal restraint of trade. The injunctive process was employed to 
prevent all such "combinations" from carrying out their legitimate 
purposes. There was no relief in sight. Rather these perversions 
of the real purpose of the law were becoming habitual tactics in 
industrial disputes and established as precedents in legalism. 

The judicial philosophy upon which these practices were based 
harked back to the olden days when the workers were villeins or 
serfs. Then their bodies and their labor power were the property 
of the masters or feudal overlords. The labor of a human being, 

^'^Congressional Record, 6ist Cong., 2d sess., 8850. 

^^ Adapted from an article with the above caption in the American Federa- 
tionist, XXI, 962-963, 971-972 (1914). 



TRADE UNIONISM 633 

labor power, is inseparable from the living bodies of the workers. 
It is intimately associated with the physical personality, and is the 
outward expression of the mentality, the ideas, the individuality of 
the workers. The labor of a human being-, labor power, is the cre- 
ative expressions of inner mentality. It cannot be a commodity 
or an article of commerce unless human beings are nothing but ma- 
terial things or legally held as property. 

After centuries of struggle the toilers established their physical 
freedom, but industrial freedom was denied them under judicial in- 
terpretation of their rights. Judicial theory looks backward for its 
sanctions ; it is guided by precedents. Judicial opinions square them- 
selves by the past, not by the present. There resulted a strange 
legal anomaly; workers were free, but part of their personality, 
their labor power, was the property of their employers who had 
property rights in the labor power of employees. For it is impossible 
to separate the power to labor, the pozver to produce, from the bodies 
of the workers. 

Denial of industrial freedom robs physical freedom of its reality 
and value. All Americans have had the right to "life, liberty, and 
the pursuit of happiness" since the revolution based on these prin- 
ciples found in the Declaration of Independence, and the establish- 
ment of our Republic. But life is something bigger than a declara- 
tion of political principle. The workers of America spend most of 
their lives in mines, workshops, factories, stores, etc., and have felt 
all the bitterness of industrial unfreedom. They have been denied 
real choice in matters relating to their employment ; they have been 
denied the right to promote their own welfare ; they have been de- 
nied the right to life in its real significance. 

Under modern industrial conditions workers as individuals are 
powerless to protect themselves against employers' aggressions, or 
to increase wages, shorten hours of labor, and improve their gen- 
eral conditions of work and life. Only through organization can 
the workers present their views of rights, defend or advance their 
interests, seek redress of grievances, and establish their best con- 
cepts and ideals of justice. The development of large-scale indus- 
tries and trusts makes labor organization doubly imperative. There 
was no longer the slightest probability of individual personal con- 
tact between employers and employees. Absentee employers con- 
ducted all dealings with employees through superintendents or fore- 
men who were held responsible only for efficiency and profits. Con- 
centration of industry and trust organization dehumanized the 
relations between employers and employees and thus helped to re- 
tain the theory that labor power — the labor of a human being — is 



634 CURRENT ECONOMIC PROBLEMS 

a commodity. Trusts waged war upon labor organizations with 
well-nigh incredible savagery and with every conceivable method 
and device. Against these attacks the workers had to protect them- 
selves in the industrial and the legal fields. It was necessary to 
secure some change in the Sherman anti-trust law — a law that had 
proved powerless to stay the increasing number of trusts but had 
deprived workers of their rights and their liberty. 

The labor sections of the Clayton Anti-Trust Act are a great vic- 
tory for organized labor. In no other country in the world is there 
an enunciation of fundamental principles comparable to the in- 
cisive, virile statement in section 6. 

Those words, the labor of a human being is not a commodity or 
article of commerce, are sledge-hammer blows to the wrongs and in- 
justice so long inflicted upon the workers. The declaratory legis- 
lation, "The labor of a human being is not a commodity or article 
of commerce," is the Industrial Magna Charta upon which the work- 
ing people will rear their structure of industrial freedom. Indus- 
trial freedom is necessary for human welfare and progress. The 
victory won by the united American labor movement is a victory for 
all humanity. 

311. Legal Exemption of Labor Combinations^^ 

BY AIvIvYN A. YOUNG 

The sixth section of the Clayton act, exempting labor combina- 
tions from the condemnation of the anti-trust laws, is as follows : 

The labor of a human being is not a commodity or article of commerce. 
Nothing contained in the anti-trust laws shall be construed to forbid the 
existence and operation of labor organizations, instituted for the purposes of 
mutual help, and not having capital stock or conducted for profit, or to 
forbid or restrain individual members of such organizations from lawfully 
carrying out the legitimate objects thereof; nor shall such organizations, or 
the members thereof, be held or construed to be illegal combinations or con- 
spiracies in restraint of trade, under the anti-trust laws. 

The declaration, ''The labor of a human being is not a commodity 
or article of commerce," is little more than an empty blague, and 
the permission given to individual members of labor organizations 
to "lawfully carry out the legitimate objects thereof" is at once harm- 
less and unavailing. If there is any effectiveness in the section it is 
in the clause, "nor shall such organizations, or the members thereof, 

^^Adapted from "The Sherman Act and the New Anti-Trust Legislation," 
in the Journal of Political Economy, XXIII, 417-421 (iQiS). 



TRADE UNIONISM 635 

be held or construed to be illegal combinations or conspiracies in re- 
straint of trade, under the anti-trust laws." 

Now no action has ever been brought for the dissolution of a 
labor union under the Sherman act. But Mr. Gompers, testifying 
before the House Committee on the Judiciary, said that labor com- 
binations exist only by tolerance of the Attorney-General. If Mr. 
Gompers' interpretation of the Sherman act is correct, if that statute 
condemns unions merely because they are combinations for collective 
bargaining, then it must be admitted that their specific exemption in 
this section is a matter of some importance. But there are reasons 
for thinking Mr. Gompers mistaken. 

In the first place, there is enough difference between the sort of 
"monopoly" which a labor union seeks to establish and such monopo- 
listic industrial combinations as are clearly condemned by the Sher- 
man act to make it uncertain whether the courts would put them in 
the same category. One is in principle an inclusive, the other an 
exclusive, monopoly. It is true that railroad mergers, such as were 
condemned in the Northern Securities and Union Pacific cases, are 
in some respects "inclusive" combinations. But the St. Louis Ter- 
minal Railroad case is a more instructive precedent. The railroad 
in question has a virtual monopoly of terminal facilities in St. Louis. 
A suit for dissolution was brought against it under the Sherman 
act. The Supreme Court did not grant a dissolution order, but 
merely directed the company so to reconstruct its organization as 
to provide that new companies might participate in its ownership 
and be given the advantage of its services on equal terms with the 
railroads then in control of it. The parallel is not perfect, for the 
Terminal Railroad of St. Louis is a natural monopoly. But the case 
suggests that if similar suits had been brought against labor com- 
binations the outcome might have been that the court would merely 
have insisted that admission to union membership must be granted 
to all applicants on fair terms. 

In the second place, it is doubtful even whether the courts would 
have deemed themselves authorized by the Sherman act to interfere 
in any degree either with the conditions of admission to union mem- 
bership or with the ordinary trade agreement which unions attempt 
to enforce. For agreements among working-men to fix wages or 
hours or conditions of employment have only an indirect and inci- 
dental effect upon interstate trade or commerce, while the courts 
have consistently held that the Sherman act covers only agreements 
which have a direct and primary effect upon such trade or commerce. 

In the third place the Sherman act has been brought to bear upon 
working-men, not because labor unions in themselves are labor 



636 CURRENT ECONOMIC PROBLEMS 

monoplies, and as such are in restraint of competition, but merely 
because strikes and boycotts have the effect of interfering in some 
degree with the free flow of goods from one state to another. This 
is, of course, what the labor interests wanted changed. It is not 
clear, however, that this section alters the law in this respect. I 
cannot imagine that the courts will hold that the provision that 
neither labor organizations nor their members shall be "held or con- 
strued to be combinations or conspiracies in restraint of trade" cov- 
ers cases of this kind. If it does, a doubt as to the constitutionality 
of the section at once arises. It is true that the Supreme Court has 
recently held that a Missouri anti-trust statute is not in violation of 
the federal Constitution, despite the fact that the statute specifically 
exempts labor combinations. But with respect to the matter in 
hand the question would be whether an exemption of such inter- 
ference with the "free flow of commerce" as comes from the ac- 
tivities of labor combinations would not amount to a denial of "due 
process of law" to the members of such other combinations as are 
condemned for similarly interfering with commerce. It is not a 
question of the legality of the restraint of competition among work- 
ing-men. The question is whether labor combinations may restrain 
interstate cojnmerce in goods while such restraint is not permitted 
to other combinations. 

There is, however, another provision in the Clayton act which 
may give labor combinations virtual immunity from the operations 
of the Sherman act. This section (the twentieth) prohibits the 
granting of injunctions by federal courts in labor disputes "unless 
necessary to prevent irreparable injury to property or to a prop- 
erty right," and specifies that such injunction shall not prohibit 
striking, picketing, or boycotting. This in itself does not prohibit 
civil suits for damages or criminal persecutions under the Sherman 
act. Probably it does not prohibit the granting of injunctions on the 
petition of the government, for the general provisions of the section 
apply only to cases "between employers and employees." But, so 
far as the delimitation of the scope of the Sherman act is concerned, 
such considerations as these become unimportant in view of the fact 
that the section concludes with the sweeping statement, "nor shall 
any of the acts specified in this paragraph be considered or held to 
be violations of any law of the United States." This is the real 
exemption section. Its constitutionality is a matter about which 
there is some doubt, but its unconstitutionality is by no means as- 
sured. If the courts sustain it, labor unions will have been effectively 
freed from the restraints of the Sherman act. 



TRADE UNIONISM 637 

H. REVOLUTIONARY UNIONISM 
312. Sabotage 

a) A Definition of Sahotage^^ 

BY ARTURO M. GIOVANNITTI 

Sabotage is : 

1. Any conscious and wilful act on the part of one or more 
workers intended to slacken and reduce the output of production in 
the industrial field, or to restrict trade and reduce the profits in the 
commercial field, in order to secure from their employers better con- 
ditions or to enforce those promised or maintain those already pre- 
vailing, when no other way of redress is open. 

2. Any skilful operation on the machinery of production in- 
tended not to destroy it or permanently render it defective, hut only 
temporarily to disable it and put it out of running condition in order 
to make impossible the zvork of scabs and thus to seciire the cojnplete 
and real stoppage of zvork during a strike. 

Whether you agree or not, sabotage is this and nothing but this. 
It is not destructive. It has nothing to do with violence, neither to 
Hfe nor to property. It is nothing more or less than the chloroform- 
ing of the organism of production, the "knock-out drops" to put to 
sleep and out of harm's way the ogres of steel and fire that watch 
and multiply the treasures of King Capital. 

b) Go Cannie^^ 

BY ARTURO M. GIOVANNITTI 

It must be said with especial emphasis that sabotage is not and 
must not be made a systematic hampering of production, that it is 
not meant as a perpetual clogging of the workings of industry, but 
that it is a simple expedient of war, to be used only in time of actual 
warfare with sobriety and moderation, and to be laid by when the 
truce intervenes. 

The form of sabotage which was formerly known as Go Cannie 
consists purely and simply -in "going slow" and "taking it easy" 
when the bosses do the same in regard to wages. 

^''Adapted from the Introduction to Pouget's Sabotage, I3-I4- Copyright 
by Charles H. Kerr & Co. 09^3 )• Written in the Essex County Jail, Law- 
rence, Massachusetts. 

^*Adapted from the Introduction to Pouget's Sabotage, 22-25. Copyright 
by Charles H. Kerr & Co. (1913). 



638 CURRENT ECONOMIC PROBLEMS 

Let us suppose that one hundred men have an agreement with 
the boss that they should work eight hours a day and get $4.00 in 
return for a certain amount of work. The American Federation of 
Labor is very particular — and wisely so — that the amount of work 
to be done during a day be clearly stipulated and agreed upon by 
the two contracting parties — the workers and their employers, this 
for the purpose of preventing any "speeding up." 

Now, to exemplify, let us suppose that these one hundred work- 
ers are bricklayers, get fifty cents an hour, work eight hours a day 
and, as agreed, lay fourteen hundred bricks a day. Now, one good 
day the boss comes up and tells them he can't pay them $4.00 a 
day, but they must be satisfied with $3.50. It is a slack season, there 
are plenty of idle men and, moreover, the job is in the country where 
the workers cannot very well quit and return home. A strike, for 
some reason or another, is out of the question. Such things do hap- 
pen. What are they to do? Yield to the boss sheepishly and 
supinely? But here comes the Syndicalist who tells them, "Boys, 
the boss reduced fifty cents on your pay — why not do the same and 
reduce two hundred bricks on your day's work? And if the boss 
notices it and remonstrates, well, lay the usual number of bricks, but 
see that the mortar does not stick so well, so that the top part of 
the wall will have to be made over again in the morning; or else 
after laying the real number of bricks you are actually paid for, build 
up the rest out of the plumb line or use broken bricks or recur to 
any of the many tricks of the trade. The important thing is not 
what you do, but simply that it be of no danger or detriment to the 
third parties and that the boss gets exactly his money's worth and 
not one whit more." 

The same may be said of the other trades. Sweatshop girls 
when their wages are reduced, instead of sewing one hundred pairs 
of pants, can sew, say, seventy; or, if they must return the same 
number, sew the other thirty imperfectly — with crooked seams — or 
use bad thread or doctor the thread with cheap chemicals so that 
the seams rip a few hours after the sewing, or be not so careful 
about the oil on the machines, and so on. 



35 



c) Put Salt in the Sugar 

If you are an engineer you can, with two cents worth of powdered 
stone or a pinch of sand, stall your machine, and cause a loss of 
time or make expensive repairs necessary. If you are a joiner or 

"Quoted from the Montpelier Labor Exchange for 1900, in Tridon, The 
New Unionism, 43-46 (1913)- 



TRADE UNIONISM 639 

woodworker, what is simpler than to ruin furniture without your 
boss noticing it, and thereby drive his customers away ? A garment 
worker can easily spoil a suit or a bolt of cloth; if you are working 
in a department store a few spots on a fabric cause it to be sold for 
next to nothing; a grocery clerk, by packing up goods carelessly, 
brings about a smashup; in the woolen or the haberdashery trade 
a few drops of acid on the goods you are wrapping will make a cus- 
tomer furious ; .... an agricultural laborer may sow bad 
seed in wheat fields, etc. 

d) The Effectiveness of Sahotage^^ 

BY ARTURO M. GIOVANNITTI 

Now that the bosses have succeeded in dealing an almost mortal 
blow to the boycott, now that picket duty is practically outlawed, 
free speech throttled, free assemblage prohibited, and injunctions 
against labor are becoming epidemic ; sabotage, this dark, invincible, 
terrible Damocles' sword that hangs over the head of the master 
class, will replace all the confiscated weapons and ammunition of the 
army of the toilers. And it will win, for it is the most redoubtable 
of all, except the general strike. In vain may the bosses get an in- 
junction against the strikers' funds — sabotage will get a more pow- 
erful one against their machinery. In vain may they invoke old 
laws and make new ones against it — they will never discover it, never 
track it to its lair, never run it to the ground, for no laws will ever 
make a crime of the "clumsiness and lack of skill" of a "scab" who 
bungles his work or "puts on the bum" a machine he "does not know 
how to run." 

There can be no injunction against it. No policeman's club. No 
rifle diet. No prison bars. It cannot be starved into submission. It 
cannot be discharged. It cannot be black-listed. It is present every- 
where and everywhere invisible, like the airship that soars high 
above the clouds in the dead of night, beyond the reach of the can- 
non and the searchlight, and drops the dealiest bombs into the 
enemy's own encampment. 

Sabotage is the most formidable weapon of economic warfare, 
which will eventually open to the workers the great iron gate of 
capitalist exploitation and lead them out of the house of bondage 
into the free land of the future. 

^* Adapted from the Introduction to Pouget's Sabotage, 35-36. Copyright 
by Charles H. Kerr & Co. (1913). 



640 CURRENT ECONOMIC PROBLEMS 

e) The Universality of Sabotage^'' 

Actions which might be classed as sabotage are used by the dif- 
ferent exploiting and professional classes. 

The truck farmer packs his largest fruits and vegetables upon 
the top layer. The merchant sells inferior articles as "something 
just as good." The doctor gives "bread pills" or other harmless 
concoctions in cases where the symptoms are puzzling. The builder 
uses poorer materials than demanded in the specifications. The 
manufacturer adulterates foodstuffs and clothing. All these are for 
the purpose of gaining more profits. 

Carloads of potatoes were destroyed in Illinois recently; cotton 
was burned in the southern states ; coffee was destroyed by the 
Brazilian planters ; barge loads of onions were dumped overboard 
in California ; apples were left to rot on the trees of whole orchards 
in Washington ; and hundreds of tons of foodstuffs are held in cold 
storage until rendered unfit for consumption. All to raise prices. 

Some forms of capitalist sabotage are legalized, others are not. 
But whether or not the various practices are sanctioned by law, it 
is evident that they are more harmful to society as a whole than is 
the sabotage of the workers. 

Capitalists cause imperfect dams to be constructed, and devas- 
tating floods sweep whole sections of the country. They have faulty 
bridges erected, and wrecks cause great loss of life. They sell 
steamer tickets, promising absolute security, and sabotage the life- 
saving equipment to the point where hundreds are murdered, as 
witness the "Titanic." 

The "General Slocum" disaster is an example of capitalist sabo- 
tage on the life preservers. The Iroquois Theater fire is an example 
of sabotage by exploiters who assured the public that the fire-curtain 
was made of asbestos. The cases could be multiplied indefinitely. 

Capitalist sabotage aims to benefit a small group of non-produc- 
ers. Working-class sabotage seeks to help the wage-working class 
at the expense of parasites. 

The frank position of the class-conscious worker is that capital- 
ist sabotage is wrong because it harms the workers ; working-class 
sabotage is right because it aids the workers. 

Sabotage is a direct application of the idea that property has no 
rights that its creators are bound to respect. Especially is this true 
when the creators of the wealth of the world are in hunger and 
want amid the abundance they have produced, while the idle few 
have all the good things of life. 

^''Quoted from an editorial in the Industrial Worker, of Spokane, Wash- 
ington, in Tridon, The New Unionism, 53-55 (i9i3)- 



TRADE UNIONISM 641 

The open advocacy of sabotage and its widespread use is a true 
reflection of economic conditions. The current ethical code, with 
all existing laws and institutions, is based upon private property in 
production. Why expect those who have no stake in society, as it is 
now constituted, to continue to contribute to its support? 

313. Industrial Versus Trade Unionism^® 

BY MARY K. o'SULLIVAN 

"We were drowning men ready to grasp at a straw when the 
Industrial Workers of the World appeared to save us," said more 
than one striker in Lawrence. Up to the present the Textile Work- 
ers of the American Federation of Labor have failed to organize the 
unskilled and underpaid workers. They have ignored their capacity 
for strength and failed to win them to their cause or to better their 
condition. In the past foreigners have been the element through 
which strikes in the textile industry have been lost. This is the 
first time in the history of our labor struggles that the foreigners 
have stood to a man to better their condition as underpaid workers. 

The textile workers had only one permanent organization at 
Lawrence at the beginning of the strike. John Golden, the official 
head of the Textile Workers of the World, instead of remaining in 
Lawrence and fighting for the interests of the workers, went to 
Boston and was reported to have denounced the strike as being led 
by a band of revolutionists. 

Members of the Industrial Workers of the World sent for Joe 
Ettor and in four days he organized a fighting force such as had 
never existed in New England before. 

Nothing was so conducive to organization by the Industrial 
Workers of the World as the methods used by the three branches of 
the American Federation of Labor. These were the Lawrence 
Central Labor Union, the Boston Women's Trade Union League, 
and the Textile Workers of America. Catholics, Jews, Protestants, 
and unbelievers — men and women of many races and languages, 
— were working together as human beings with a common cause. 
The American Federation of Labor alone refused to cooperate. As 
a consequence, the strikers came to look upon the federation as a 
force almost as dangerous to their success as the force of the em- 
ployers themselves, and I violate no confidence in saying that the 
operatives represented in the strike committee have more respect 
for the mill owners than for the leaders of this antagonistic element 

^^Adapted from an article in The Survey, XXVIII, 72-74- Copyright 
(1912). 



642 CURRENT ECONOMIC PROBLEMS 

within their own ranks. A striker who went to the federation for 
rehef was looked upon as recreant to his cause and before the strike 
ended the American Federation of Labor organizations, by openly 
refusing to give any one help who refused to return to work, came 
to be looked upon as a trap designed in the interests of the mills to 
catch any workers who could be induced to desert their cause. 

314. The Standpoint of Syndicalism^^ 

BY LOUIS LETVINE 

The fact which is untiringly emphasized in the Syndicalist analy- 
sis is the objective antagonistic position of those engaged in modern 
industry. The owners of the means of production directly or indi- 
rectly running their business for their private ends are interested 
in ever-increasing profits and in higher returns. The workingmen, 
on the other hand, who passively carry on productive operations are 
anxious to obtain the highest possible price for their labor-power 
which is their only source of livelihood. Between these two economic 
categories friction is inevitable, because profits ever feed on wages, 
while wages incessantly encroach upon profits. 

From this twofold antagonism, rooted in the structure of modern 
economic society, struggle must ever spring anew, and this is the 
reason why all schemes and plans to avoid industrial conflicts fail 
so lamentably. Even the conservative trades unions, based on the 
idea that the interests of labor and capital are identical, are forced 
by circumstances to act contrary to their own profession of faith. 
Organizations like the Civic Federation are doomed to impotency. 
Boards of conciliation and arbitration work most unsatisfactorily 
and can show but few and insignificant results. 

All efforts, therefore, to establish industrial peace under existing 
conditions result at best in the most miserable kind of social patch- 
work which but reveals in more striking nudity the irreconcilable 
contradictions inherent in modern economic organization. 

There is but one logical conclusion from the point of view of 
Syndicalism. If industrial peace is made impossible by modern 
economic institutions, the latter must be done away with and indus- 
trial peace must be secured by a fundamental change in social organ- 
ization. At the root of the struggle between capital and labor is the 
private ownership of the means of production which results in the 
autocratic or oligarchic direction of industry and in inequality of 

^"Adapted from an article in the Annals of the American Academy of 
Political and Social Science, XLIV, 114-118. Copyright (1912). - 



TRADE UNIONISM 643 

distribution. The way to secure industrial peace is to remove the 
fundamental cause of industrial war, that is^ to make the means of 
production common property, to put the management of industry on 
a truly democratic basis and to equalize distribution. 

The Syndicalist distrusts the state and believes that political 
forms and institutions have outlived their usefulness and can not 
be adapted to new social relations. The Syndicalist program for 
the future, in so far as it is definite and clear, contains the outlines 
of an industrial society — the basis of which is the industrial union, 
and the subdivisions of which are federations of unions, and federa- 
tions of federations. The direction of industry, in this ideal system, 
is decentralized in such a manner that each industrial part of society 
has the control only of those economic functions for the intelligent 
performance of which it is especially fitted by experience, training, 
and industrial position. 

The creative force of the industrial struggle, according to the 
Syndicalist, manifests itself in a series of economic and moral 
phenomena which, taken together, must have far-reaching results. 
In the struggle for higher wages and better conditions of work the 
workingmen are led to see the important part they play in the 
mechanism of production and to resent more bitterly the opposition 
to their demands on the part of employers. With the intensification 
of the struggle, the feeling of resentment develops into a desire for 
emancipation from the conditions which make oppression possible; 
in other words, it grows into complete class consciousness which 
consists not merely in the recognition of the struggle of classes but 
also in the determination to abolish the class-character of society. 
At the same time the struggle necessarily leads the workingmen to 
effect a higher degree of solidarity among themselves, to develop 
their moral qualities, and to fortify and consolidate their organiza- 
tions. 

It is evident that unless the Syndicalist could theoretically con- 
nect the struggles of the present with his ideal of the future, the 
latter would remain a beautiful but idle dream even in theory. He 
is bound, therefore, to find concrete social forces working for the 
realization of his ideal. His position forces him to prove that his 
ideal is the expression of the interests of a definite class, that it is 
gradually being accepted by that class under the pressure of circum- 
stances, and that the social destinies of the "revolutionary" class 
are more and more identified with the Syndicalist ideal. 

He cheerfully accepts the conclusion that if industrial strife is 
creating social harmony his task is to intensify the struggle, to 
widen its scope, and to perfect its methods — in order that the creative 



644 CURRENT ECONOMIC PROBLEMS 

force of the struggle may manifest itself as thoroughly and on as 
large a scale as possible. He, therefore, logically assumes a hostile 
attitude towards all efforts tending to mitigate the industrial 
struggle, such as conciliation and arbitration, and definitely enters 
the. economic arena for the purpose of stirring up strife and of 
accentuating the struggle as much as is in his power. 

315. The General Strike*" 

BY ARTHUR D. LEWIS 

A logical extension of the local strike leads to the ''general strike," 
which, in its extremest form, is a strike of all the workers in the 
world, in order to expropriate all the owners of land and capital, 
and accomplish a world revolution. This is to be brought about by 
the spread of the strike-spirit. Obviously, if miners, transport- 
workers (that is, railway, dock, cartage, and tram employees), 
textile- workers, and building-trade workers (to select a few trades), 
all stopped work, it might be near enough to a total strike for all 
practical purposes, and the phrase "general strike" is not applied 
with any much stricter meaning than that of a very large strike. 

The advantage of the general strike has been declared to be that 
"it is a revolution which commences in legal action, with legality," 
and that it is so general that the mobilization of an army of suppres- 
sion would be difficult if not impossible." 

"If you believe in the necessity for maintaining what has been 
called the catastrophic conception — the feeling, that is, that the world 
will only be born again by a complete regeneration, a complete rup- 
ture of the present social structure; if you are persuaded that the 
idea of the social revolution is the necessary symbol which must 
guard in the heart of the workers the sense of the abyss which 
separates the classes, and the gap which exists between capitalist 
society and socialist society; then you must recognize that nothing 
but the idea of the general strike is capable of creating and develop- 
ing these revolutionary ideas." 

The most important part of a general strike, however, would be 
a strike of soldiers and police. If this took place while many great 
trades were arrested, a revolution might actually be near at hand. 
"What barricades and refusal of taxes have been to the bourgeois, 
the general strike is for the working-class. It is the ultima ratio 
which enters the scene after all other means have been exhausted." 
It is usually conceived that the shooting of unarmed strikers, inno- 
cent of any crime, is likely to be, at some time or other, a great cause 

*°Adapted from Syndicalism and the General Strike, 217-226 (1912). 



TRADE UNIONISM 645 

of an extension of a small strike into a very large one: the mere 
presence of crowds in the streets has on many occasions been a 
means of spreading an idea. 

A complete disorganization of the means of communication (the 
letter-post and telegraph) would probably produce a greater psycho- 
logical effect (as apart from directly material inconvenience) than 
any other single failure in the routine of society. 

Society, although based on force, is largely carried on by means 
of the knowledge that force can be exerted. The real success of a 
general strike must depend on its generality: if a vast majority of 
the workers of a country ever ■voluntarily struck, it is no doubt true 
that the entire system of present-day society would be at its end. 
What, however, must usually happen in great strikes is that some 
men are thrown out of work ''without in the least sympathizing with 
the strike or its purposes. They will be the shopkeepers, the busi- 
ness men, and great sections of the working-classes. As the strike 
proceeds and the price of food reaches famine levels, and its scarcity 
becomes chronic, the ranks of the malcontents will be increased." 
The point is obvious : you cannot get in actual fact a division of 
society with all the workers on one side. 

By many, the idea of the general strike will be quickly dismissed 
as a wild fancy, a horror of the night, to which it is not necessary 
to devote serious day thoughts. It may, however, be thought that, 
although the general strike is exceedingly unlikely to take place, 
in days of growing discontent, the possible methods by which a 
strike might really paralyze society are worth considering. 

If all the clerks struck work: ours is a civilization built on 
ledgers, and just imagine — if the money in the rich man's purse was 
all the money he could get because there were no cashiers at the 
bank — if, for want of shipping clerks, no one knew how to send 
goods from Antwerp to Pernambuco — if the builders and decorators 
spent hours in puzzling over the real cost of jobs in order to send 
in estimates to customers, and partners in financial houses, abso- 
lutely unaware what bills were due for payment or who was to do 
what in the multitudinous subsidiary wheels of the details of their 
business, simply raved uselessly and idly around, in a week no one 
would know whether he was bankrupt or had multiplied his fortune. 
Now let us imagine that there was simultaneously a strike of trans- 
port workers — workers on railways, trams, ships, omnibuses, tubes, 
cabs, and public conveyances of every kind — while the clerks had 
stopped all the bookkeeping, letter-writing, insurance, and record- 
keeping business of the country, and that no one could get to busi- 
ness except by walking — to say nothing of the disorganization of 



646 CURRENT ECONOMIC PROBLEMS 

home life — the rise in cost of food, injury to health, want of news 
owing to non-delivery of papers, and so on — which would follow. 
If to these two strikes — the clerks and the transport workers — a 
third, that of the coal-miners, be added, it will, without explanation, 
be seen how fearful would be the position of society, if the wage- 
earners ever became even approximately able all to strike work 
together. 

Van Kol declares it to be "an anarchist Utopia ;" if it were 
possible because of the strong organization of the working-class and 
their unshakable discipline, better means would also be at their 
disposal. The poor would suffer first from the famine caused by it. 
Kautsky says that in a real general strike, as every employer would 
be equally hit, the main weapon of the striker, the fear of losing 
trade to competitors, would be non-existent. Like many others, he 
approves of the political strike intended to obtain definite conces- 
sions from a government, but not of a general economic strike; 
the political strike tends to destroy a government by a direct dis- 
organization of the country governed: it is a contest between the 
cohesive force of the strikers on the one side and of the government 
on the other. The more foolish and feeble the government, the 
better the occasion for striking: also the more unforeseen and spon- 
taneous the strike the greater is its effect. 

But the Syndicalist's ideal is precisely the general economic 
strike. 

In so far as men unite, and twenty-five shillings a week does not 
look down on eighteen, the chances of success increase, and the 
general strike becomes more possible. 



XII 
SOCIAL REFORM AND LEGAL INSTITUTIONS 

From time out of mind the value and permanence of "fundamental" 
institutions have been questioned. The escape in America from a discus- 
sion of problems so basic has been largely due to the newness of our 
1 society. The open frontier, the wide distribution of industrial opportunity, 
the lack of formal class lines, and a spirit of self-reliance have centered 
our attention upon the more immediate problems of applying a machine- 
technique to a new continent and of collecting the golden returns. So 
closely have we been absorbed in this that we have regarded our insti- 
tutions as a part of the immutable universe itself, as unalterable as the 
paths of the stars. 

But with our consciousness of maturity we are beginning to realize 
that in the immediate future we must newly evaluate our institutions. Three 
lines of development are responsible for this change in attitude. First, we 
are victims of intellectual curiosity. The emphasis placed upon the general 
ideas of "evolution" and "organism" in our intellectual system has led 
investigators to explore the institutional realm, and they have brought back 
word to us that our institutions are but social conventions, and that, though 
they change slowly, they nevertheless change. Accordingly they are losing 
the attribute of absoluteness with which we have been accustomed to endow 
them. Secondly, there is a growing feeling that wealth is inequitably dis- 
tributed. This attitude was apparent in our discussion of the tariff, the 
railroads, the trusts, the immigration problem. It manifests itself clearly 
in discussions of the problems of labor and in the literature of socialism. 
Even so late as a decade ago the conflict between those who proposed rad- 
ical changes in our present social arrangements and the upholders of the 
present order turned upon the issue of the source of value. Today questions 
of market-process are no longer strategic points of conflict between the oppos- 
ing systems. The clash now is over institutions. Accordingly we find 
questions of the social and industrial reform engaging the attention, not 
only of the economist, but of the student of jurisprudence, the political 
scientist, the sociologist, and the philosopher as well. Thirdly, the peculiar 
nature of the industrial system is forcing such questions to the front. 
Unlike other systems. Modern Industrialism makes use of a vast co-opera- 
tive productive system. In this there are employed vast aggregates of 
accumulated wealth. A consciousness of the importance of this large volume 
of "socialized capital" is leading to the formation of a "gospel of wealth" 
not unlike the mediaeval "doctrine of stewardship." The disposition to 
justify or condemn ownership or use of productive goods by "social results" 
is becoming stronger. Together these three lines of development are increas- 
ing our interest in problems of an institutional nature. 

Four closely related problems are treated below as typical of the whole 
group. The first, and in a sense the one which comprehends all the others, 
is the legal system. It has been pronounced alike "a subtle device of capit- 
alism for enslaving the laborer" and "the supreme palladium of our lib- 
erties." Its defenders insist that "law is the conservative factor in social 
development" and declare its stability a necessary condition to industrial 
and social advance. Its opponents insist that it is still bound by the natural- 
rights philosophy of the eighteenth century, that it is living in a world of 
fictions, and that it knows nothing of the reality of Modern Industrialism. 
A second institution, which is little else than an aspect of this larger first, is 

647 



648 CURRENT ECONOMIC PROBLEMS y 

the system of jurisprudence as interpreted by the courts. It is easy to dis- 
cern a fundamental antithesis between the theory of social or group solidar- 
ity underlying much recent legislation and the individualistic philosophy 
which finds expression in court decisions. It is easy to criticize the legislation 
as overlooking "natural rights" which the "courts were established to main- 
tain." It is equally easy to condemn the courts for their inability to appre- 
ciate the theory of group welfare underlying such legislative enactments. 
It is a far more difficult problem to suggest a practical way in which the 
antithesis can be solved. 

A third institution under attack is our system of private property. Most 
of those who condemn the institutions are moved by the inequalities in wealth 
which they charge to it. Their attitude is alike shortsighted and individual- 
istic. The institution is commonly defended upon the ground that property- 
owners are entitled to "what they produce," the assumption being that they 
"produce" their property. It need not be said that this defense is as weak 
as the attack. There is, however, a growing disposition to judge the insti- 
tution by its less immediate "social consequences." Thus it is attacked 
because of its creation and perpetuation of artificial inequalities in income, 
because of its influence in stratifying society on pecuniary lines, and because 
of the dominant social position which it gives to the owners of large aggre- 
gates of material wealth. Its defenders, in like manner, stress the incentive 
which it furnishes to individual initiative, the function which it performs 
in social organization by placing productive property under efficient man- 
agement, and its contribution to material development in furthering the 
accumulation of capital. Perchance a system may be devised for combin- 
ing the advantages of economic democracy with those of an advancing 
material culture. If so, by all means let us adopt it. But if the antithesis 
is irreconcilable, we must choose between two things, both of which offer 
advantages and disadvantages. Perchance it may be best to sacrifice material 
advancement ; but it is to be feared that the present generation cannot easily 
be convinced of that. Perhaps we may be fortunate enough to retain the 
institution, but can succeed in modifying it in such a way as to establish 
a necessary connection between the privileges and the responsibilities of 
ownership. At best the problem contains many contradictory values, and 
turns upon the larger question of the type of society that is desirable. 

A fourth and closely related institution is that of individual liberty, 
embracing as it does the legal convention of freedom of contract.* A nec- 
essary complement of private property in a flexible industrial system, it is 
the very epitome of the older institutional complex. Its modification is 
threatened by the rise of the newer group spirit, through such legislative 
initiatives as regulation of monopoly, prescription of hours of labor, legal 
restraints upon hiring and discharge, etc. How sweeping its modification is 
to be only the future can tell. 

Our attention to our institutional framework of society has just begun. 
The range of inquiry is as broad as human life itself ; the other problems 
discussed in this volume only begin to show its comprehensiveness. By 
conscious change many of our institutions are to be profoundly modified. 
If the newer life finds the institutional molds too rigid, the change may 
be rapid and revolutionary. But most important of all are the changes in 
these institutions which are gradually being effected by a process of growth 
which we but dimly see, and the changes which these institutions in turn are 
inducing in the complex of our developing scheme of life and values. 



SOCIAL-LEGAL INSTITUTIONS 649 

A. THE LEGAL SYSTEM 
316. The Economic Basis of Law^ 

BY ACHII^IwE; IvORIA 

Changes in the prevailing economic conditions necessarily in- 
-volve corresponding alterations in law. The history of law furnishes 
us with clear and definite demonstration of the fact. During the 
primitive period when law was worked out upon a family and not 
upon a property basis, mother-right prevailed universally. Under 
more modern conditions we are struck with amazement at the simi- 
larity in legal systems prevailing among the most diverse peoples. 
The ancient law of the Romans and Germans alike shows us the 
same classification of persons ; among both the law maintained 
the inviolability of private property, determined the boundaries of 
patrimonial .fields, proclaimed the personal nature of an obligation, 
and fixed the rigorous bonds that shackled the liberty of the debtor. 

That so striking an analogy should exist in the legal system of 
two peoples so profoundly different and so widely separated is highly 
significant : on the one hand, because it reverses the theory that law 
is an emanation of national consciousness ; and upon the other, be- 
cause it shows that the law necessarily depends upon existing eco- 
nomic conditions. The Romans and the primitive Germans were 
different in race and manners and lived under different climatic con- 
ditions. Between the two peoples there was nothing in common be- 
yond the identity of their economic systems ; or, to put it more 
definitely, there was nothing in common except identical territorial 
conditions, which irresistibly impelled them to adopt an identical 
economic constitution. The analogy in legal systems must neces- 
sarily have resulted from the one element common to them both, 
their economic system. 

The Roman economy and the German economy proceeded to- 
gether for a certain time. But after the collective economy gave 
way to the system of capitalistic property, their ways lay apart ; 
for Germany's free land, being of a low grade of fertility, could 
be taken from the laborer without serious violence, while in South- 
ern Europe, with its fertile land, blood and iron alone could pre- 
vent the laborers from establishing themselves on the free land. 
This led in Southern Europe to an admirably perfected capitalistic 

^Adapted from The Economic Foundations of Society, 80-86. Translated 
by Lindley M. Keasbey (1899). 



650 CURRENT ECONOMIC PROBLEMS 

system upon which a correspondmg legal structure was raised. The 
resulting system of legal relations and doctrines remain to our day 
a superb monument to Latin genius. 

The slave economy was never rigorously established in Teu- 
tonic countries; the suppression of free land there assumed the 
milder form of serfdom. Thus there was produced a legal system 
differing from that of Rome in three respects : it instituted patri- 
archal relations between property and labor; it protected the serf 
from arbitrar}- acts of violence by the proprietor; and it placed re- 
spect for the family and a sentiment of solidarity above the mere sat- 
isfaction of brutal egoism. With the disintegration of Roman so- 
ciety, the classic law fell into abeyance. Southern Europe was 
forced to introduce the serf system, and it then became expedient 
to substitute the Germanic code for the classic law of Rome. This 
substitution was not a victor}^ of Teutonic over Roman law; it was 
simply the natural reproduction of a legal system to meet the reap- 
pearance of the very economic conditions that had originally given 
it life. We thus have additional proof of the law's exclusive de- 
pendence upon the economic structure of society. 

In a somewhat analogous manner the later institution in Ger- 
many of economic relations similar to those formerly prevailing in 
Rome introduced the Roman law into that countr)^ Here the grow- 
ing wage economy engendered a new set of relations between prop- 
erty and labor, and these had to give rise to institutions heretofore 
unknown. The new system offered a profound analog}^ to that of 
the Roman slave economy. Thus, though the law regulating the 
wage contract had to be an original creation of the new economic 
system, the law regulating the relations among proprietors could 
practically be reproduced in its classic form. Xow it is exactly 
these relations that constitute the essential object of the law. The 
Roman law, accordingly, emerged from the tomb where it had so 
long reposed into the expansion of a new life. The movement to- 
ward this awakening commenced in Italy where the wage economy 
first began to develop. Its passing from Italy into Germany was 
but the necessary correlation of the economic revolution that spread 
these same conditions throughout Northern Europe. 

Thus legal history shows us that instead of being the product of 
abstract reason, or the result of national consciousness, or a racial 
characteristic, the law is simply the necessary outcome of economic 
conditions. 



SOCIAL-LEGAL INSTITUTIONS 651 

317. Social Rights and the Legal System^ 

BY ROSCOE POUND 

A generation ago it would have been hard to find anyone to ques- 
tion that upon the whole the American law was quite what it should 
be. But first the economists and sociologists and students of govern- 
ment, and then the bar itself, have been thinking upon this matter 
freely and vigorously until criticism has become stable. The need 
for agitation has passed. Now for a season we need careful diag- 
nosis and thoroughgoing study of the lines along which change is to 
proceed. 

Legal history shows that from time to time legal systems have 
to be remade, and that this new birth of a body of law takes place 
through the infusion into the legal system of something from with- 
out. A purely professional development of law, which is necessary 
in the long run, has certain disadvantages, and the undue rigidity 
to which it gives rise must be set off from time to time by receiving 
into the legal system ideas developed outside of legal thought. Such 
a process has taken place in the history of our own law. In the six- 
teenth and seventeenth centuries the common law, through purely 
professional development in the King's Courts, had become so sys- 
tematic and logical and rigid that it took no account of the moral 
aspects of causes to which is was to be applied. With equal impar- 
tiality its rules fell upon the just and the unjust. The rise of the 
Court of Chancery and the development of equity brought about 
an infusion of morals into the legal system — an infusion of the 
ethical notions of chancellors who were clergymen, not lawyers — 
and made over the whole law. Again, in the eighteenth century, the 
law had become so fixed and systematized by professional develop- 
ment as to be quite out of accord with a commercial age. As the 
sixteenth-century judge refused to hear of a purely moral question, 
asking simply what was the common law, so the eighteenth-century 
judge at first refused to hear of mercantile custom and commercial 
usage, and insisted upon the strict rules of the traditional law. But 
before the century was out, by the absorption of the law merchant, 
a great body of non-professional ideas, worked out by the experi- 
ence of merchants, had been infused into the legal system, and had 
created or made over whole departments of the law. 

Today a like process is going on. The sixteenth-century judge 
who rendered judgment upon a bond already paid, because no 
formal release had been executed, and refused to take account of the 

^Adapted from "Social Problems and the Courts," in the American Jour- 
nal of Sociology, XVIII, 33I-34I (1912). 



652 CURRENT ECONOMIC PROBLEMS 

purely moral aspects of the creditor's conduct ; the great judge in 
the eighteenth century who refused to allow the indorsee of a 
promissory note to sue upon it, because by the common law things 
in action were not transferable, and would not listen to the settled 
custom of merchants to transfer such notes, nor to the statement 
of the London tradesmen as to the unhappy effect of such a ruling 
upon business, have their entire counterpart in the judges of one of 
the great courts of the United States in the twentieth century to 
whom the economic and sociological aspects of a question appear 
palpably irrelevant. 

The sixteenth- and seventeenth-century law was brought to take 
account of ethics. The eighteenth-century law came to receive the 
custom of merchants as part of the law of the land. May we not 
be confident that in the same way the law of the twentieth century 
will absorb the new economies and the social science of today and 
be made over thereby? 

It is an infusion of social ideas into the traditional element of 
our law that we have to bring about ; and such an infusion is going 
on. The right course is not to tinker with our courts and with our 
judicial organization in the hope of bringing about particular re- 
sults in particular kinds of cases, at a sacrifice of all that we have 
learned or ought to have learned from legal and judicial history. 
It is rather to provide a new set of premises, a new order of ideas 
in such form that the courts may use them and develop them into a 
modern system by judicial experience of actual cases. A body of law 
which will satisfy the social workers of today cannot be made of 
the ultra-individualist materials of eighteenth-century jurisprudence 
and nineteenth-century common law based thereon, no matter how 
judges are chosen or how often they are dismissed. 

A master of legal history tells us that taught law is tough law. 
Certainly it is true that our legal thinking and legal teaching are to 
be blamed more than the courts for the want of sympathy with social 
legislation which has been so much in evidence in the immediate 
past. One might almost say that instead of recall of judges, recall 
of law teachers would be a useful institution. At any rate, what 
we must insist upon is recall of much of the juristic and judicial 
thinking of the last century. 

For many reasons which cannot be taken up here, our concep- 
tion of the end of the legal system came to be thoroughly individual- 
istic. Legal justice meant securing of individual interests. It sought 
by means of law to prevent all interference with individual self- 



SOCIAL-LEGAL INSTITUTIONS 653 

development and self-assertion, so far as this might be done con- 
sistently with a like self-development and self-assertion on the part 
of others. It conceived that the function of the state and of the law 
was to make it possible for the individual to act freely. Hence it 
called for a minimum of legal restraint, restricting the sphere of 
law to such checks as are necessary to secure "a harmonious coex- 
istence of the individual and of the whole." This purely individual- 
ist theory of justice culminated in the eighteenth century in the 
Declaration of the Rights of Man and the Bill of Rights so char- 
acteristic of that period. Spencer's formula of justice, "the liberty 
of each limited only by the like liberties of all," represents the ideal 
which American law has had before it during its whole existence. 
In poHtics, in ethics, and in economics this conception has decayed, 
and has given way to a newer idea of justice. But it continues to 
rule in jurisprudence. 

In contrast with such juristic thinking of the immediate past, 
which started from the premise that the object of the law was to 
secure individual interests and knew of social interests only as in- 
dividual interests of the state or sovereign, the juristic thinking of 
the present must start from the proposition that individual inter- 
ests are to be secured by law because and to the extent that they 
are social interests. There is a social interest in securing individual 
interests so far as securing them conduces to general security, se- 
curity of institutions and the general rural and social life of indi- 
viduals. Hence while individual interests are one thing and social 
interests another, the law, which is a social institution, really 
secures individual interests because of a social interest in so doing. 

Study of fundamental problems of jurisprudence, not petty 
changes of the judicial establishment, is the road to socialization of 
the law. First of all, there must be a definition of social justice to 
replace the individualistic or so-called legal justice which we have; 
there must be a definition of social interests and a study of how 
far these are subserved by securing the several individual interests 
which the law has worked out so thoroughly in the past ; there must 
be a study of the means of securing these social interests otherwise 
than by the methods which the past had worked out for purely in- 
dividual interests. Second, there must be a study of the actual 
social effects of legal institutions and legal doctrines. Courts cannot 
do this, nor can law teachers or law writers, except within narrow 
limits. The futility of a self-sufficing, self -centered science of law 
has become apparent to jurists. 



654 CURRENT ECONOMIC PROBLEMS 

318. Law and Social Statics^ 

BY ouve;r w. holmes 

This case is decided upon an economic theory which a large part 
of the country does not entertain. If it were a question whether I 
agreed with the theory I should desire to study further and long 
before making up my mind. But I do' not conceive that to be my 
duty, because I strongly believe that my agreement or disagreement 
has nothing to do with the right of the majority to embody their 
opinion in law. It is settled that state constitutions and laws may 
regulate life in many ways that we as legislators might think inju- 
dicious, or if you like, as tyrannical as this, and which equally inter- 
fere with the liberty of contract. This liberty of the citizen to do 
as he likes so long as he does not interfere with the like liberty of 
others to do the same, which has been a shibboleth for many well- 
known writers, is interfered with by school laws, by the Post Office, 
by every state and municipal institution which takes his money for 
purposes thought desirable, whether he likes it or not. The 14th 
Amendment does not enact Herbert Spencer's Social Statics. A con- 
stitution is not intended to embody a particular economic theory, 
whether of paternalism and the organic relations of a citizen to the 
state, or of laissez-faire. It is made for people of fundamentally 
differing views. 

General propositions do not solve concrete problems. The decis- 
ion will depend on a judgment or intuition more subtle than any ar- 
ticulate major premise. Every opinion tends to become law. I 
think that the word liberty in the 14th amendment is perverted when 
it is held to prevent the natural outcome of a dominant opinion, un- 
less it can be said that a rational and fair minded man would neces- 
sarily admit that the proposed statute would infringe fundamental 
principles as they have been understood by the traditions and the 
laws of our people. 

319. The Social Function of Law 

BY HOMER HOYT 

The critics of the current legal system seem to be agreed as to 
the baneful effect of its static character. Law is said to be a sur- 
vival of eighteenth-century philosophy which cannot be justly ap- 

^Lochner v. New York, 198 U. S. 74- This the well-known "bake-shop 
case." A statute passed by the New York legislature, regulating the hours 
of labor in bake shops, was declared unconstitutional. The selection given is 
an excerpt from a dissenting opinion (1904). 



SOCIAL-LEGAL INSTITUTIONS 655 

plied to twentieth-century society. The favorable hearing which 
this plea is receiving indicates that it is in keeping with the growing 
tendency of an age of industrial change to emphasize the dynamic 
and evolutionary elements of its institutions. The demand for rela- 
tive standards of jurisprudence becomes more insistent, as people 
become more convinced of the unique and marvelous character of 
their own epoch. We are told that legal codes should be developed 
out of the experience of the society to which they are to be applied, 
and that any law whose basis is broader than the time and place in 
which it is now established, to the extent that it fails of this coinci- 
dence, is clearly unjust. In particular, our present society, which is 
so different from other societies both in degree of complexity and 
in kind of organization, necessarily requires rules of conduct which 
are adapted to its institutions. The scope of laws is not only to be 
narrowed to a brief time unit, but their application to different 
classes of individuals at the same moment is to be carefully re- 
stricted. As commonly expressed, justice consists in giving to every 
person a square deal, and this is generally interpreted to mean judg- 
ment of the individual by the rules of the game which were set for 
his particular social environment. Perfect justice could be secured 
in every case, according to these critics, by discarding past stand- 
ards and by deciding each case upon its merits. This involves noth- 
ing less than the abandonment of objective rules of judgment, and 
the substitution in their place of the subjective test of the psycho- 
logical laboratory. The indictment is thus chiefly directed against 
the social value of static standards of law. 

The apologists for the existing legal institutions assert that stable 
standards of law are necessary to secure this very special consid- 
eration of the merits of each individual case, which constitutes the 
very essence of individual justice. They would remind their critics 
that legal principles originate in social intercourse, and are concerned 
with the conduct of individuals in relationships where some com- 
munity of understanding is indispensable. The social conventions 
and institutions are the relatively static elements in society, and it is 
necessary for their function as media of social communication that 
they should be so. Their purpose is to furnish a convenient agency 
of mutual expression, which can be acquired with a minimum of ef- 
fort on the part of the individual, and to establish an agreement 
among diverse and heterogeneous interests in regard to matters 
where unanimity is of great advantage to the individual. Law ac- 
quires its static character by becoming so familiar that it no longer 
requires conscious attention. Men form habits in regard to their 
legal institutions, for the same purpose that they form habits in 



656 CURRENT ECONOMIC PROBLEMS 

regard to language — to economize the time and effort of carrying 
on relations with their fellows. Legal standards thus enter indis- 
solubly into the thoughts, acts, and characters of men as a part of 
their fundamental assumptions, which they accept without question. 
Individual acts inevitably carry forward the theory of law which 
existed prior to their performance, and thus tend to perpetuate the 
same principles. The prohibition of retroactive laws is universally 
considered necessary to prevent confiscation of property, and for- 
feiture of vested rights, but it accomplishes its purpose by guaran- 
teeing a certain degree of stability in our legal system. Justice to 
the individual, according to the conception entertained in the pre- 
ceding paragraph, can be assured only by recognizing the social 
value of static laws in setting up guideposts to direct individuals 
to the legal road. The complexity of modern civilization confuses 
and bewilders one who has no definite knowledge of its laws. As an 
immigrant in a strange land feels helpless and insecure because of 
ignorance of the unfamiliar social organization, so the native citizen 
is nonplused by shifting and unstable legal standards. The conse- 
quences of action may be that the individual is subjected to extraor- 
dinary civil and criminal liability, for society imputes legal responsi- 
bility to one definite act of the many which have co-operated to pro- 
duce the final result. The criminal act itself is criminal in view 
of the social attitude which prevails at the time, and the justice of 
enforcing the social attitude is dependent upon announcement of it 
beforehand in terms sufficiently definite to put individuals upon their 
guard. 

Uncertainty as to what is legal, when the consequences of guess- 
ing wrongly may result in heavy penalties, blights forward action 
in its very inception, at the moment when the individual is deciding 
to make the positive step required to overcome the safety and cer- 
tainty of doing nothing. At this point the society whose duty it was 
to establish laws and administer justice finds itself deeply con- 
cerned, for upon the decision of the individuals depends its progress 
as a group. Activity of individuals is even more necessary to so- 
ciety than regulatory measures whose purpose is to secure the best 
type of activity. But when the rules of law depart from fixed 
standards to suit the exigencies of particular cases to such an extent 
that they cease to be trustworthy guides for future action, then law, 
instead of creating an attitude favorable to progress, deadens indi- 
vidual activity. In society as at present organized the social advan- 
tages of continued production and the opening of new lines of en- 
terprise would be destroyed, were law made immediately responsive 
to social conditions, by the very agency which is designed to increase 



SOCIAL-LEGAL INSTITUTIONS 657 

social efficiency. A fairly stable and certain standard of law must 
necessarily be established to tempt individual initiative, and this im- 
plies that individual standards of justice must give way to a com- 
mon standard of justice, which all individuals having social dealings 
can understand and interpret. Otherwise the plea of unusual cir- 
cumstances or peculiar temperament will readily lend itself to arbi- 
trary and capricious rules of law, the very possibility of which will 
foster suspicion and distrust of judicial processes. It is only be- 
cause men are fairly certain that the main bases of property and 
contract rights will not be suddenly and substantially altered to 
their disadvantage, that they strike out into new fields of enterprise. 
It is only because individuals are confident that the court will not 
construct special standards to apply to their acts,. that they will pro- 
ceed with decision upon tomorrow's work. If all things were sub- 
ject to change, would anyone confine his attention to one task even 
for a moment? Entrepreneurs may be able to calculate with some 
degree of accuracy the probable changes in the factors which will 
affect future markets for their products, but if the very standards 
by which they have made their calculations vary at the discretion of 
a future court, how accurately can they allow for these unprece- 
dented psychological factors? 

Definite rules of law are formulated by court decisions as well 
as by statutory enactment. In the case of court-made law the recog- 
nition of precedents is indispensable to the existence of the law, for 
a legal principle is not established until it comes to be acknowledged 
as binding upon the facts to which it applies. As fast as new laws 
are developed, the number of doubtful questions is diminished, and 
the road is cleared for fresh consideration of new situations which 
arise out of the dynamic progress of society. It is as necessary, 
therefore, that the courts be relieved of the enormous burden of re- 
considering old issues, as it is for the individual to find definiteness 
in the law. As individuals accept the greater part of the questions 
arising out of their social relations as definitely settled, and proceed 
to expend money and effort upon the assumption that the definite 
rules will not be reversed, so the courts resolve new cases by com- 
paring them with cases already decided. In thus basing their de- 
cisions on precedent, the courts are often unfairly accused of ap- 
plying a blind rule of thumb to avoid the trouble of exerting in- 
genuity and using wisdom in devising methods of equitable relief. 
But it is manifestly far more unjust to reverse the settled principles 
upon the faith of which men have acquired power and governed their 
courses of action in the past than to enact into law the court's own 
unfettered opinion as to the justice of the case, which may or may 



658 CURRENT ECONOMIC PROBLEMS 

not coincide with what is generally accepted. Considerations of 
practicability enforce this course upon the courts. The task of 
reconciling conflicting precedents itself gives the widest leeway for 
the exercise of ingenuity, and the frequency with which cases are 
decided by a divided opinion indicates the difhculty involved in 
finding a definite course. The application of legal principles is con- 
sequently far more than the readaptation of past rules to present 
situations. The growth of new social environments changes the 
force of old arguments and compels a modification of many rules. 
The precedent which was at first stated in a broad and abstract form 
is given definite meanings by concrete applications. Its logical rela- 
tionship to other precedents is developed as occasion requires, and 
the extent of its scope is definitely determined by an interaction with 
other precedents. Into the old rules is infused the spirit of the new 
developments; the outworn and archaic elements are cast out and 
new elements are added. The whole system of jurisprudence is 
made to grow by mingling into the substance of the law the view- 
points of each successive age. 



B. PRIVATE PROPERTY 
320. The Development of the Right of Property* 

BY ge;orgi; b. newcomb 

Private property, which we are wont to regard as essential to 
hberty, was the product of experiment rather than the conscious 
device of reason. Authorities on primitive peoples have given 
us the strongest reason "for thinking that property once belonged, 
not to the individuals, but to larger societies, composed on the patri- 
archal model." Actual examination of existing village communities 
affords support to the conjecture "that private property, in the shape 
in which we know it, was chiefly formed by the gradual disentangle- 
ment of the separate rights of individuals from the blended rights 
of the community." 

Progress in the history of nations is certainly marked by the 
recognition of private property; and by an increase, as well, in the 
amount and variety of individual, compared with public or unap- 
propriated goods, as in the abstractness or far-reachingness of the 
individual claim. This indicates that society is unconsciously adapt- 
ing itself to the necessity of altered conditions. Practices introduced 

^Adapted from "Theories of Property," in the Political Science Quar- 
terly, I, 595-599- Copyright (ir"'~ 



SOCIAL-LEGAL INSTITUTIONS 659 

accidentally became habitual and universal by the experience of their 
advantages. At first the ethical feeling of society was undoubtedly 
against property, since everything that tended to individualism v^as 
discouraged by the tribal feeling of self-preservation. Its establish- 
ment was a mere concession to necessity. 

The right of private property was vigorously asserted by the 
Romans and inserted in their law. The close binding up of property 
with the person of the owner was due to the influence of the time 
when the claim to private property was founded in the personal 
prowess of the warrior. The principle of law referred the right of 
property to "first possession, labor, succession, and donation." 

The life and thought of the Middle Ages were unfavorable to 
the development of the feeling of individual right in property, though 
the way was slowly preparing for this. The influence of the Chris- 
tian conception of the sacredness of the human person was operating 
silently; the laborer was not absolutely enslaved. And the power 
of the military chief over his domain land gives an absolute con- 
ception of property, which is transferred to individual ownership 
generally after the dissolution of feudal institutions. Hence, so 
long as feudalism held is sway, modern property conceptions could 
not make way. The rights of labor could have no standing; for, 
"if any tenant were allowed to acquire property in the improve- 
ments effected by him, the whole feudal system of mutual depend- 
ence and obligation would have been at an end." The feudal baron 
expressed his title in the robber-motto: Per Deum et ferrum-, 
obtinui. The bucolic contentment of this simpler period, the ab- 
sence of trade to awaken multifarious desires, and the influence of 
religion, all contributed to repress economic individualism. As for 
the last-mentioned influence, property was regarded as an encroach- 
ment on the original rights of all the members of the human family. 

Very different were the ideals of that time from those of the in- 
dustrial age soon to follow : in the one, poverty canonized ; in the 
other, poverty remanded to the fit society of stupidity and indolence ! 
But even when the whir of industrial activity began in the Middle 
Ages, the spirit and method of work is still comparatively com- 
munal. 

It is not necessary to point out all the causes — notably the devel- 
opment of industrialism, the growth of the contract system, and the 
increase of wealth by trade and commerce — which aided to give 
that strength to the feeling of right attending private possession, 
which has in modern times made it so self-asserting. Only it should 
not be overlooked that with the growth of property man became 
intensely attached to what he owns. 



66o CURRENT ECONOMIC PROBLEMS 

321. Property and Stewardship^ 

BY ST. BASIIv 

The rich man argues, Whom am I wronging so long as I keep 
what is my own? Tell me, just what things are your own? From 
whom did you get them to make them an inseparable part of your 
life? You act like a man in a theater who hastens to seize all the 
seats and prevent the others from entering, keeping for his own 
use what was meant for all. How do the rich become rich save 
by the seizure of the things that belong to all ? The earth is given 
in common to all men. Let no man call his own that which has been 
taken in excess of his needs from a common store. If everyone 
were to take simply what he needed, there would be no distinction 
of rich and poor. Were you not born naked ? Shall you not return 
naked to the earth? Whence then the goods you now possess? If 
you ascribe them to fate you are godless, neither recognizing the 
Creator nor being grateful to the giver. But you acknowledge they 
are from God. Tell us, then, why you received them. Is God un- 
fair in the equal distribution of the good things of life? Why is it 
that you are rich and another is in need? Isn't it wholly that you 
may win the reward of kindness and of faithful stewardship, and 
that he may be honored with the great prize of patience? Now after' 
seizing all things in your insatiable greed, and thus shutting out oth- 
ers, do you really think you are wronging no man? Who is the 
man of greed? He who is not content with a sufficiency? Who is 
the thief? He who seizes everybody's goods? What are you but 
a greedy miser? What are you but a thief? The things you re- 
ceived to dispense to others, these you made your own. The man 
who steals a coat from another is called a thief. Is he who can 
clothe a naked man and will not, worthy of any other name? The 
bread you keep in store is the hungry man's bread. The cloak which 
you guard in the chest belongs to the naked man. The silver you 
hide away belongs to the needy. Thus it is that you are wronging as 
many men as you might help if you chose. 

322. The Ethics of Property^ 

BY PIE;rRE: JOSEPH PROUDHON 

If I were asked to answer the question, "What is slavery?" and 
I should answer in one word, "It is murder," my meaning would be 

^Adapted from Migne, Patrologiae Cursus Completus, Series Graeca, 
XXXI, col. 275 (370). 

^Adapted from What Is Property? 12-13. Tr. by Benjamin R. Tucker 
(1840). 



SOCIAL-LEGAL INSTITUTIONS 66 1 

understood at once. No extended argument would be required to 
show that the power to take from a man his thought, his will, his 
personality, is a power of life and death ; and that to enslave a man 
is to kill him. Why, then, to this other question, ''What is prop- 
erty?" may I not likewise answer, "It is robbery," without the cer- 
tainty of being misunderstood; the second proposition being no 
other than a transformation of the first? 

One author teaches that property is a civil right, born of occu- 
pation and sanctioned by law ; another maintains that it is a natural 
right, originating in labor — and both of these doctrines, totally op- 
posed as they^may seem, are encouraged and applauded. I contend 
that neither labor, nor occupation, nor law, can create property ; that 
it is an effect without a cause : am I censurable ? 

But murmurs aris6 ! 

Property is robbery ! That is the signal of revolutions. 

Reader, calm yourself. I am no agent of discord, no firebrand 
of sedition. I anticipate history by a few days; I disclose a truth 
whose development we may try in vain to arrest; I write the pre- 
amble of our future constitution. This proposition which seems to 
you blasphemous — property is robbery — would, if our prejudices 
allowed us to consider it, be realized as the lightning-rod to shield 
us from the coming thunderbolt ; but too many interests stand in 
the way! Alas! philosophy will not change the course of events: 
destiny will fulfil itself regardless of prophecy. Besides, must not 
justice be done and our education be finished? 

323. Progress and Property'^ 

BY PAUIv ElvMER MORE 

Not even a Rousseau could cover up the fact of the initial in- 
equality of men by the decree of that great Ruler or Law which 
makes one vessel for dishonor and another for honor. This is the 
so-called injustice of nature. And it is equally a fact that property 
means the magnifying of that natural injustice into that which you 
may deplore as unnatural injustice, but which is a fatal necessity, 
nevertheless. This is the truth, hideous if you choose to make it so 
to yourself, true to those, whether the favorites of fortune or not, 
who are themselves true — ineluctable at least. 

Unless we are willing to pronounce civilization a grand mistake, 
as, indeed, religious enthusiasts have ever been prone to do (and 
humanitarianism is more a perverted religion than a false eco- 
nomics), unless our material progress is all a grand mistake, we must 

''Adapted from an article entitled "Property and Law," in the Unpopular 
Review, III, 259-268. Copyright (1915). 



662 CURRENT ECONOMIC PROBLEMS 

admit, sadly or cheerfully, that any attempt by government to ig- 
nore that inequality may stop the wheels of progress or throw the 
world back into temporary barbarism, but will surely not be the 
cause of wider or greater happiness. It is not heartlessness, there- 
fore, to reject the sentiment of the humanitarian, and to avow that 
the security of property is the first and all-essential duty of a civil-, 
ized community. 

And we may assert this truth more bluntly, or, if you please, more 
paradoxically. Although, probably, the rude government of bar- 
barians, when the person was scantily covered or surrounded by 
property, may have dealt principally with wrongs to persons, yet the 
main care of advancing civilization has been for property. One 
reason, of course, is that the right of life is so obvious, and in the 
nature of things has been so long and universally recognized. But, 
after all, life is a very primitive thing. Nearly all that makes it more 
significant to us than to the beast is associated with property. To 
the civilized man the rights of property are more important than 
the right to life. 

In our private dealings with men, we may ignore the laws of 
civilization with no harm resulting to society ; but it is different when 
we undertake to lay down general rules of practice. We are essen- 
tially, not legislators, but judges. And what then, you ask, are 
human laws ? In sober sooth, it is not we who create laws ; we are 
rather finders and interpreters of natural laws, and our decrees are 
merely the application of our knowledge, or our ignorance, to par- 
ticular conditions. When our decrees are counter to natural law, 
they become at best dead letters, and at worst, agents of trouble 
and destruction. Law is but a rule for regulating the relations of 
society for practical purposes. We are bound to deal with man as 
he actually is. So, if our laws are to work for progress, they 
must recognize property as the basis of civilization, and must admit 
the consequent inequality of conditions among men. They will have 
relatively little regard for labor in itself or for the laborer in him- 
self, but they will provide rigidly that labor shall receive the recom- 
pense it has bargained for, and that the laborer shall be secure in 
the possession of what he has received. We may try to teach him 
to produce more, or to bargain better, but in the face of all appeals 
of sentiment society must learn again today that it cannot legislate 
contrary to the decrees of Fate. Taw is concerned primarily with 
the rights of property. 

So directly is the maintenance of civilization and peace and all 
our welfare dependent upon this truth — that it is safer, in the ut- 



SOCIAL-LEGAL INSTITUTIONS 663 

terance of law, to err on the side of natural equality than on the 
side of ideal justice. We can do something to control the power of 
cunning and rapacity, and to make the distribution of material ad- 
vantages fall more in conformity with superiority of character and 
culture. We can go a little way, and very slowly, in the endeavor 
to equalize conditions by the regulation of property; but the ele- 
ments of danger are always near at hand and insidious ; and undoubt- 
edly any legislation that deliberately releases labor from the obliga- 
tions of contract, and permits it to make war on property with im- 
punity, must be regarded as running counter to the first demands of 
society. It is an ugly fact that, under cover of the natural inequality 
of property, evil and greedy men will act in a way that can only be 
characterized as legal robbery. The state should prevent such 
action so far as it safely can. Yet even here, in view of the magni- 
tude of the interests involved, it is better that legal robbery should 
exist along with the maintenance of law, than that legal robbery 
should be suppressed at the expense of law. 

You may to a certain extent control property and make it sub- 
servient to the ideal nature of man; but the moment you deny its 
rights, or undertake to legislate in defiance of them, you may for a 
time unsettle the very foundations of society, you will certainly in 
the end render property your despot and so produce a materialized 
and debased civilization. Manifestly, the mind will be free to en- 
large itself in immaterial interests only when the material basis is 
secure, and without a certain degree of such security a man must 
be anxious over material things and preponderantly concerned with 
them. And, manifestly, if this security is dependent upon the right 
of property, and these rights are denied or belittled in the name of 
some impossible ideal, it follows that the demands of intellectual 
leisure will be regarded as abnormal and anti-social. 

No doubt the ideal society would be that in which every man 
should be filled with noble aspirations. But I am not here con- 
cerned with Utopian visions. My desire is to confirm in the dic- 
tates of their own reason those who believe that the private owner- 
ship of property is, with very limited reservations, essential to the 
material stability and progress of society. We who have this con- 
viction need to remind ourselves that laws which would render cap- 
ital insecure, and, by a heavy income tax or other discrimination in 
favor of labor, would deprive property of its power of easy self- 
perpetuation, though they speak loudly in the name of humanity, 
will in the end be subversive of those conditions under which alone 
any true value of human life can be realized. 



664 CURRENT ECONOMIC PROBLEMS 

This, I take it, is the reason that the church and the university- 
have almost invariably stood as strongly reactionary against any in- 
novation which threatened the entrenched rights of property. It is 
not at bottom the greed of possession that moves them, nor are we 
justified in casting into their teeth the reproach that they who pro- 
fess to stand for spiritual things are in their corporate capacity the 
most tenacious upholders of worldly privilege. They are guided by 
an instinctive feeling that in this mixed and mortal state of our exis- 
tence, the safety and usefulness of the institutions they control are 
finally bound up with the inviolability of property which has been 
devoted to unworldly ends. For if property is secure it may be a 
means to an end, whereas if it is insecure it will be the end itself. 

324. Mine — Property and Rights^ 

BY DAVID M. PARRY 

1. Man must work for a living. He would have no intelligence 
if he lived in a Garden of Eden, because if Nature provided all his 
needs ready to hand for his use there would be no reason for him to 
do any thinking, and the result would be that he wouldn't think. 
Therefore it is in order to make him develop his intelligence that 
man is compelled to wrestle with nature for his livelihood. 

2. Each man is entitled to the results of his own exertions. To 
say otherwise would be to assert that some men have the right to 
live on the fruits of the toil of others without working themselves, 
which would be contrary to our first proposition. Hence personal 
ownership of property is a necessary deduction from the law that 
man must work for a living. 

3. Each individual is entitled to freedom of action. Being 
assured that what he produces is his own he is constantly spurred 
on to develop his capacity to produce. Being assured also that he 
cannot profit by another's exertions he realizes that he is responsible 
to himself alone for what he makes out of himself. Therefore each 
man has an undeniable right to dispose of his own time and labor 
as he sees fit, or in other words to work out his own destiny. The 
effect of this is to develop strong, self-reliant and intelligent men. 
It brings into play the creative faculty of man, his highest faculty, 
and the faculty that constitutes him a free agent in so far as he is 
such an agent. 

4. It is right and just that one man should obtain more of this 
world's goods than another. Since personal ownership of property 
and individual freedom are both valid deductions from the first 

^Adapted from To Organized Labor, 16-18 (1903). 



SOCIAL-LEGAL INSTITUTIONS 665 

premise that all men shall work, then no complaint can honestly be 
made because one man by superior exertion or ability manages to 
produce more than another and consequently has more to show for 
his labor than another. The fact that one man succeeds in making 
himself a better living than others is itself a spur to other men to 
try all the harder. This is what causes progress and the evolution 
of the race. 

5. Capital arises by reason of the fact that one man can produce 
and own more than another. Some men find that they can produce 
more than they absolutely need for themselves, and therefore they 
store up some of their labor in making a machine, and this machine 
is capital. Here is your frightful "bugbear," capital, coming into 
existence as the direct and legitimate result of the so-called primal 
curse that man must labor. It is born as the result of the industry, 
thrift, self-sacrifice, and intelligence of the few as compared to 
the many. 

6. Industrial ownership of capital is not only the direct deduc- 
tion from the right of every man to that which he possesses, but 
it is also necessary for its creation. Men will waste their property 
in fast living or they will work only part of the time if they find 
that there is no profit in saving. If a man employs men to make a 
machine and pays them out of his savings, certainly these men have 
no valid title to the machine, for they have received for their toil 
as much, if not a little more, than they would have received for any 
other labor they could have performed. Neither have the men who 
are subsequently employed to run the machine any title of owner- 
ship in it, for they certainly cannot claim to have made it. The 
ownership correctly lies in the man who paid for the making of it, 
and the fact that men can convert their savings into a productive 
machine that will grind out more savings is the incentive that causes 
men to have machinery made. 

7. Capital, despite individual ownership, benefits the many much 
more than it does the few. It is in fact emancipating man from 
drudgery and poverty. Capital brings to the assistance of man the 
forces of nature in producing commodities. It not only enables him 
to produce the things he needs or desires with the expenditure of 
less labor than formerly, but it constantly tends to lift him up from 
lower to higher pursuits. 

8. Wages are dependent upon the aggregate production. If a 
nation produces but little there is but little to divide. The opposite 
is true if it produces a great deal. Now the utilization of capital is 
the only method of greatly increasing the production per capita. 
Strikes, organized idleness, boycotts, etc., cannot fail in reducing 



666 CURRENT ECONOMIC PROBLEMS 

instead of increasing the general rate of wages, and that because 
they decrease the aggregate production instead of increasing it. 
Since they cause less to be made than would have been made, it is 
a clear mathematical proposition that some are going to suffer when 
it comes to casting up the balance sheet, 

9. The law of supply and demand is the great law regulating 
industry under this individualistic or capitalistic regime. It operates 
(i) to direct the energies of the nation along channels that will 
be the most profitable to all; (2) it makes on the whole the highest 
possible use of every individual according to his capability and the 
need that exists for various kinds of services he can perform; 
(3) it regulates the accumulation of capital, tending to increase its 
accumulation more at one time than at another, dependent upon the 
urgency of the need for it ; (4) it increases nominal wages and 
decreases the prices of commodities as it becomes more utilized, thus 
automatically giving to labor the benefits of capital as fast as it is 
to the interest of labor that it should be done. 

325. My Apology 

BY P. PROPERTY 

What have I to say why judgment should not be passed against 
me ? why I should not be banished from human society ? why, with 
creatures of darkness, I should not be cast into the outer void? I 
have little to say. But my long and effective services to society 
speak eloquently for themselves, and I may as usual content myself 
with few words. I need only enumerate in briefest form the rec- 
ord of my accomplishments, and I feel that my defense is complete. 
I mention my achievements not boastfully, being as modest as my 
first name Private signifies, but only as earnests of what society may 
expect from me in the future. 

For society, and in furtherance of civihzation, I, Private Prop- 
erty, assert that I have performed these services, to-wit : 

First, I have rendered the fundamental conditions of social and 
industrial fife safe and secure. Before I came into my own, the 
power to seize and hold summed up the ethics of ownership. Ener- 
gies that might have gone into more productive employments were 
used in defending one's own or in appropriating one's neighbor's. 
But I established and secured social sanction and universal respect 
for the right of possession. 

Second, the security thus afforded had caused the energies of 
men to be diverted from the acquisition to the production of wealth. 
It has led to the utilization of natural resources, and has provided 



SOCIAL-LEGAL INSTITUTIONS 667 

opportunity for the use of long-continued and consistent industrial 
policies which have caused material goods to increase verily a hun- 
dred fold. 

Third, such security has furnished an incentive to man as a 
worker to utilize his productive capacities to the full. It has caused 
him to sow, because it has promised that he, and not another, should 
reap. It has led him to sacrifice immediate gain in establishing new 
processes and in devising new instruments of production to the end 
that the earth might be crowned with abundance. 

Fourth, I plead innocent of the charge of having favored a priv- 
ileged "leisure class," upon whom I have showered plenty that has 
been wasted in riotous living. It is true that I have conferred 
wealth upon a few. But these few I have not particularly favored. 
I have chosen them for highly important and extremely dangerous 
social service. I have assigned to them the task of experimentation 
in consumption. Whatever bad they have found they have dis- 
carded. The good that they have discovered has in time been made 
the property of the masses. They are the vanguard of my army 
which is engaged in raising the standard of living. The goods sup- 
plied to them are not rewards ; they consist only of the laboratory 
materials necessary to the work which they are doing. Witness 
their suffering, their costs, and you can appreciate the heroism 
which makes them willing to serve society in so dangerous and 
important an undertaking. The extent to which, through their 
pioneer service, the formerly rigid boundaries of consumption have 
been extended attests my wisdom. 

Fifth, I have greatly increased the product of industry by the 
use of vast stores of capital. The economic inequality which I 
have perpetuated has been the cause of the existence of so fruitful 
a fund. For its bulk has come from the very large incomes whose 
source I am. The savings which become the capital that turns the 
wheels of our mills, runs our machines, and speeds our trains across 
the continent on their missions of service are possible only because 
of me. And, but for the security which I offer, the investment of 
these savings would be impossible. 

Sixth, I supply the people with abundance and contribute to the 
fullness of their lives. The security which I have brought about 
has almost eliminated risks. The result is decreased costs, which I 
generously offer to the public in decreased prices. The long-time 
productive operations, the improvements in technique, and the cumu- 
lative investment of capital, which I have brought about, confer the 
favors of plenty, variety, and cheapness upon all sorts and condi- 
tions of men. My aristocratic methods have been mere devices for 



668 CURRENT ECONOMIC PROBLEMS 

securing democratic ends. I have forced my owners to use me 
productively. I have made them stewards of the commonweal. 

Seventh, I have led society in its development to higher and 
higher planes. Out of my abundance they have been able to satisfy 
more and more of their rnaterial wants. The certainty with which 
I have endowed the satisfaction of the necessary material wants has 
enabled those who choose to give of their time, energy, and means 
to the immaterial things of life. Our culture, with its wide horizon 
and its varied content, is my handiwork. That civilization is not 
coarse and material and brutal is my doing. 

Eighth, I have prevented a passing sentimentalism from sacri- 
ficing these more permanent values to the passing fancy of the 
moment. I have, at the cost of much misunderstanding and malig- 
nant criticism, prevented the wealth that was needed for a richer 
life for the generations of the future from being wasted in satisfy- 
ing the immediate wants of a few surplus individuals who promised 
no contribution to culture. I have preferred to have such wealth 
used in enlarging capital, thus making for bounty of goods, and in 
social experimentation whose end was to lead men to richer and 
fuller life. I have seen clearly that a deficiency of human life could 
easily be supplied within a generation, but that a deficiency in capital 
can never be made up; that cumulatively it becomes greater as the 
years pass ; and that it must deny life to many yet unborn and rob 
others of comforts which otherwise would have made their lives less 
vain and hollow. 

Ninth, I have proved myself the custodian of peace and have 
laid the foundations of a world-wide Christian community. The 
system of vested interests with which I have surrounded labor and 
capital has done more for the cause of peace than all other agencies 
combined. For I have increased many fold the costs to all classes 
of engaging in war. The world-wide industrial system which I have 
wrought is more powerful than all armaments combined in pro- 
tecting a state against the encroachments of another state and it 
contributes more to nation's understanding of nation than the whole 
world-wide system of diplomacy. My success has not been com- 
plete, but that merely makes my continued presence and activity all 
the more necessary. 

I would not detract one whit from the good intentions of my 
malefactors. I bear them no malice. My only plea is that I be 
judged according to my fruits. I am done. 



SOCIAL-LEGAL INSTITUTIONS 669 

C. INDUSTRIAL LIBERTY 
326. The Mediatory Character of Freedom^ 

BY THOMAS HILL GREEN 

We shall probably all agree that freedom, rightly understood, is 
the greatest of blessings. But when we thus speak of freedom, we 
do not mean freedom from restraint or compulsion. We do not 
mean merely freedom to do as we like quite irrespective of what it 
is that we like. We do not mean a freedom that can be enjoyed by 
one man at a cost of a loss of freedom to others. We mean rather 
a positive power of doing or enjoying something that is worth doing 
or enjoying, and that, too, something that we do or enjoy in com- 
mon with others. We mean by it a power which each man exercises 
through the help or security given him by his fellow-men, and which 
in turn he helps to secure for them. When we measure the prog- 
ress of a society by its growth in freedom, we measure it by the 
increasing development on the whole of those powers of contributing 
to social good with which we believe the members of the society to 
be endowed ; in short, by the greater power on the part of the citi- 
zens to make the most and best of themselves. 

Thus, though there can be no freedom among men who act under 
compulsion, yet the mere removal of compulsion is in itself no con- 
tribution to true freedom. In one sense no man is so well able to 
do what he likes as the wandering savage. He has no master. There 
is no one to say him nay. Yet we do not count him really free, 
because the freedom of savagery is not strength, but weakness. The 
actual powers of the noblest savage do not compare with those of 
the humblest citizen of a law-abiding state. He is not the slave 
of man, but he is the slave of nature. Of compulsion by natural 
necessity he has plenty of experience, though of restraint by society 
none at all. Nor can he deliver himself from that compulsion 
except by submitting to this restraint. So to submit is the first step 
in true freedom, because the first step in the exercise of the faculties 
with which man is endowed. 

But we rightly refuse to recognize the highest development on 
the part of an exceptional individual or exceptional class, as an 
advance toward the true freedom of man, if it is founded on a 
refusal of the same opportunity to other men. The powers of the 
human mind have probably never attained such force and keenness 
as among the small groups of men who possessed civil privileges 

"Adapted from the "Lecture on Liberal Legislation and Freedom of Con- 
tract," Works, III, 270-373. Edited by R. L. Nettleship (i^" 



670 CURRENT ECONOMIC PROBLEMS 

in the small republics of antiquity. But the civilization and free- 
dom of the ancient world were short-lived because they were partial 
and exceptional. If the ideal of true freedom is the maximum of 
power for all the members of human society to make the best of 
themselves, we are right in ranking modern society, with all its con- 
fusion and ignorant license and waste of effort, above the most 
splendid of ancient republics. 

If I have given a true account of that freedom which forms 
the goal of social effort, we shall see that freedom of contract is 
valuable only as a means to an end. That end is what I call free- 
dom in the positive sense, the liberation of the powers of all men 
equally for contributions to a common good. 

327. Contract and Co-operation" 

BY he;nry sidgwick 

Withdraw contract — suppose that no one can count upon anyone 
else fulfilling an engagement — and the members of a human com- 
munity are atoms that cannot effectively combine; the complex 
co-operation and division of employments that are the essential 
characteristics of modern industry cannot be introduced among such 
beings. Suppose contracts freely made and effectively sanctioned, 
and the most elaborate social organization becomes possible, at least 
in a society of such human beings as the individualistic theory con- 
templates — gifted with mature reason and guided by enlightened 
self-interest. Of such beings it is plausible to say that, when once 
their respective relations to the surrounding material world have 
been determined so as to prevent mutual encroachment and secure 
to each the fruits of his industry, the remainder of their positive 
mutual rights and obligations ought to depend entirely on that 
coincidence of their free choices, which we call contract. The doc- 
trine of contract I do not examine; I only refer to it to show the 
far-reaching importance of the notion of contract in the individual- 
istic view of the organization of society. 

328. Contract and Personal Responsibility^^ 

BY ARTHUR TWINING HADLEY 

A statement of the history of modern freedom, and one that 
ought to command assent in the twentieth century, is that it repre- 
sents a passage from a system of obligations imposed by the com- 

^"Adapted from The Elements of Politics, 78-79 (1887). 

*^ Adapted from The Relations betzveen Freedom and Responsibility in 
the Evolution of Democratic Government, 74-83. Copyright by Yale Univer- 
sity Press (1903). 



SOCIAL-LEGAL INSTITUTIONS 671 

munity to a system of self-imposed obligations. Duty, in the early 
stages of society, is enforced by lynch law. In the later stages it is 
enforced by the individual conscience. It is not that the obliga- 
tions recognized are narrower or less exacting in the latter case than 
in the former. They tend to become wider and more exacting. But 
the method of enforcement allows the individual to get at things in 
his own way. We have passed from a system of status, where each 
man was born into a set of legal rules and duties imposed upon him 
for all time, to a system of contract, where each man's rights and 
duties are largely those which he has made for himself. This change 
has not enabled man to relieve himself of obligations to his fellow- 
men. It has allowed these obligations to take forms suited to the 
varied powers of the individual and the varied needs of society. 
We can trace at least some of the stages in this process of evolution. 

The system of caste, or status, is a survival of the old tribal 
organization, where law and morals were undistinguished; where 
social arrangements existed by the authority of the gods ; and where 
any attempt to disturb them was an act of sacrilege. In course of 
time, however, there came about an alteration in the character of the 
legal penalties. Where one man had wronged another uninten- 
tionally, it became possible not only to inflict punishment, but to 
exact compensation. Instead of the fine which was exacted for 
an offense against public order, the community could compel the 
payment of damages to make good the loss to the person injured. 
Even where the wrong was intentional the idea of compensation 
could enter into the penalty. When once the legal authorities grasped 
this possibility of using a civil remedy, instead of a criminal one, it 
became possible to allow to any man who could pay substantial dam- 
ages a degree of personal liberty which was not possible under a 
system where every infraction of others' rights must be treated as 
a crime and visited by criminal penalties. 

From the development of civil damages it was but a short step 
to the system of contracts. The essential idea of a contract is that 
one or both parties agree to perform a certain service at a future 
time. The obligation which a man assumes in a contract is volun- 
tary until he has made the agreement. After that society will compel 
him to pay damages for its breach, just as it would compel him to 
pay damages for the breach of any of the other rights of his fellow 
citizens. It is therefore, in its very essence, a combination of free- 
dom and responsibility. It is a means which the community can 
adopt for getting work done by the voluntary assumption of obliga- 
tions on the part of its members. These obligations they can be 
compelled to perform or to furnish compensation to the other party. 



672 CURRENT ECONOMIC PROBLEMS 

Among the many brilliant contributions of the Roman lawyers to 
the progress of civilization, there was probably none so far-reaching 
as their development of the theory of contract. For, wherever this 
theory was applied, it taught people that the exercise of freedom 
involved the assumption of responsibility, and could safely be com- 
bined with it. 

The lesson was not easy to learn, and the Roman lawyers did 
not succeed in teaching it to the civilized world for all time. The 
irruption of the barbarians into Europe brought with it, under the 
feudal system, a nearly complete return to the old theory of a status. 
But with the close of the feudal period the ideas of the Roman law 
were taken up and widely expanded. The power of making a con- 
tract, under the old Roman law, had been practically limited to the 
few men who could furnish security for the performance of their 
obligations. It belonged chiefly to the minority of freemen who 
enjoyed the benefits of slavery. At the close of the Middle Ages, 
however, the reintroduction of the idea of contractual obligation as 
a basis for social order was accompanied by a system of emancipa- 
tion which gave the laborer a certain amount of property right in 
the product of his toil. The substitution of industrial for military 
tenure put a much larger number of people in a position to furnish 
security. It enabled the people as a whole, instead of the privileged 
few, to enjoy the system of education in responsibility which marks 
the growth of contract law. 

For our modern law of contract is a most valuable system of 
moral education, operating alike upon lawyers and upon laymen, 
and enabling us to make progress both in our judicial ethics and in 
our general tone of public morality. The whole English commercial 
law of the seventeenth and eighteenth centuries, with its distinctions, 
sometimes fine drawn but always well drawn in matters like agency 
or warranty, competence or negligence, involves a systematic enforce- 
ment of responsibility under the forms of freedom. If we wish to 
see what this legal development has accomplished in the way of 
introducing responsibility, we have only to contrast our standards 
of practice and ethics in those lines where commercial law has been 
developing for centuries with those where its application is compara- 
tively new. If I sell a cow on the basis of certain representations, 
which prove to be false, the law holds me to an implied contract of 
warranty, even if I have explicitly disclaimed any intention to 
warrant the animal. If I sell a railroad under similar circumstances 
the law offers the sufferer no corresponding remedy ; and no small 
section of the public applauds the seller for the shrewdness which 
he has displayed in the transaction. If I use an individual position 



SOCIAL-LEGAL INSTITUTIONS 673 

of trust to enrich myself at the expense of others, the law will 
compel me to make restitution, even where criminal intent was 
absent. But if I profit by similar errors in the management of a 
corporate trust, the difficulty of bringing the responsibility home is 
great indeed. 

It is the ideal of a free community to give liberty wherever 
people are sufficiently advanced to use it in ways which shall benefit 
the public, instead of ways which will promote their own pleasure 
at the public expense. And it has been the practice of the most 
successful communities to go farther than this, and give freedom 
somewhat in advance of this ethical development. Liberty is directly 
advantageous wherever the ethical development of the community 
fits people for its use; it is likely to prove indirectly advantageous 
wherever there is a fair prospect that they can be taught to improve 
their ethical standards in the immediate future. 

329. Labor and Freedom of Contract^^ 

What "Freedom of Contract" Has Meant to Labor 

1. Denial of eight-hour law for women in Illinois. 

2. Denial of eight-hour law for city labor or for mechanics 
and ordinary laborers. 

3. Denial of ten-hour law for bakers. 

4. Inability to prohibit tenement labor. 

5. Inability to prevent by law employer from requiring em- 
ployee as condition of securing work, to assume all risk from injury 
while at work. 

6. Inability to prohibit employer selling goods to employees at 
greater profit than to non-employees. 

7. Inability to prohibit mine owners screening coal which is 
mined by weight before crediting same to employees as basis of 
wages. 

8. Inability to legislate against employer using coercion to pre- 
vent employee becoming a member of a labor union. 

9. Inability to restrict employer in making deductions from 
wages of employees. 

10. Inability to compel by law payment of wages at regular 
intervals. 

11. Inability to provide by law that laborers on public works 
shall be paid prevailing rate of wages. 

12. Inability to compel by law payment of extra compensation 
for overtime. 

^^Adapted from a bulletin used at the Chicago Industrial Exhibit in 1906. 



674 CURRENT ECONOMIC PROBLEMS 

13. Inability to prevent by law employer from holding back 
part of wages. 

14. Inability to compel payment of wages in cash ; so that em- 
ployer may pay in truck or scrip not redeemable in lawful money. 

15. Inability to forbid alien labor on municipal contracts. 

16. Inability to secure by law union label on city printing. 

330. Static Assumptions of Contractual Freedom^^ 

BY ROSCOi; POUND 

"The right of a person to sell his labor," says Mr. Justice Har- 
lan, "upon such terms as he deems proper is, in its essence, the same 
as the right of the purchaser of labor to prescribe the conditions 
upon which he will accept such labor from the person offering to 
sell it. So the right of the employe to quit the service of the em- 
ployer, for whatever reason, is the same as the right of the employer, 
for whatever reason, to dispense with the services of such employe. 
In all such particulars the employer and the employe have equality 
of right, and any legislation that disturbs that right is an arbitrary 
interference with the liberty of contract, which no government can 
legally justify in a free land."^* With this positive declaration of a 
lawyer, the culmination of a line of cases now nearly twenty-five 
years old, a statement which a recent writer on the science of juris- 
prudence has deemed so fundamental as to deserve quotation and 
exposition at an unusual length, let us compare the equally positive 
statement of a sociologist : "Much of the discussion about 'equal 
rights' is utterly hollow. All this ado about the system of contract 
is surcharged with fallacy." 

To everyone acquainted with the facts at first hand the latter 
statement goes without saying. Why, then, doi the courts persist 
in the fallacy? Why do so many of them force upon legislation an 
academic theory of equality in the face of practical inequality? 
Why do we find a great and learned court in 1908 taking a long 
step into the past of dealing with the relations between employer and 
employe in railway transportation, as if the parties were individ- 
uals, as if they were farmers haggling over the sale of a horse? 
Why is the legal conception of the relation of employer and employee 
so at variance with the common knowledge of mankind? Surely 
the cause of such doctrine must lie deep. Let us enquire then what 
these causes are and how they have operated to bring about the 
present state of the law of freedom of contract. 

"Adapted from "Liberty of Contract," in 18 Yale Law Journal, 454-487 
(1909). 

"-^ Adair v. U. S., 208 U. S. 161. 



SOCIAL-LEGAL INSTITUTIONS 675 

There is no doubt that the theory of ''natural rights" is at the 
basis of modern conceptions of freedom of contract. This began 
as a doctrine of political economy, as a phase of Adam Smith's doc- 
trine which we commonly call laissez faire. It was propounded as 
a utilitarian principle of politics and legislation by Mill. Spencer 
derived it from his formula of justice. In this way it became a chief 
article in the creed of those who sought to minimize the functions 
of the state, to insist that the most important of its functions was 
to enforce by law the obligations created by contract. This theory 
has shown itself present in both legislation and judicial decisions. 
As a consequence the doctrine of liberty of contract is bound up in 
the decisions of our courts with a narrow view as tO' what consti- 
tutes special or class legislation, that greatly limits effective law 
making. For one thing there is the doctrine that apart from consti- 
tutional restrictions there are individual rights resting on a natural 
basis, to which the courts must give effect, beyond the control of 
the State. ''In the judicial discussions of liberty of contract this idea 
has been very prominent. One court reminds us that natural per- 
sons do not derive their right to contract from the law.^^ Another 
court in passing adversely upon legislation against company stores, 
says any classification is arbitrary and unconstitutional unless it pro- 
ceeds on "the natural capacity of persons to contract."^'' Another, in 
passing on a similar statute, denies that contractual capacity can be 
restricted except for physical or mental disabilities.^^ Another holds 
that the legislature cannot take notice of the de facto subjection of 
one class of persons to another in making contracts of employment 
in certain industries, but must be governed by the theoretical jural 
equality.^® 

Not only, however, is natural law the fundamental assumption 
of our law and legal philosophy, but we must not forget that it is 
the theory of our bills of rights. Not unnaturally the courts have 
clung to it as being the orthodox theory of constitutions. But the 
fact that the framers held that theor}^ by no means demonstrates 
that they intended to impose the theory on us for all time. They 
laid down principles, not rules, and rules can only be illustrations of 
principles so long as the facts and opinions remain what they were 
at the time when the rules were announced. Forgetfulness of this 
latter fact and an intense zeal for natural rights theory has led to a 
desire to extend this freedom as far as possible and to limit as much 
as possible whatever would tend to interfere with this, such as the 
number and kinds of incapacities which would justify a restraint of 

"S8 Ark. 407. ^'33 W. Va. 188. 

"115 Mo. 307. ^^61 Kas. 140. 



676 CURRENT ECONOMIC PROBLEMS 

this liberty. The decisions of the courts plainly reveal this. They 
agree that the term "liberty" is broader than Coke's use of it, that 
the fact that Coke confined it to freedom of physical motion and 
locomotion does not exclude a broader interpretation today. Yet 
the same courts that recognize that liberty must include more today 
than it did as used in Coke's Second Institute, lay it down that the 
incapacities are to remain what they were at the common law, that 
new incapacities of fact, arising- out of present industrial situations, 
may not be recognized by legislation. Restraints upon that freedom 
must find some justification in the existence of like limitations recog- 
nized at the old common law. 

This appears perhaps no more clearly than in the efforts of the 
courts to reconcile the existence of usury laws with their notion of 
liberty of contract. As was said in 113 Pa. St. 427, "The right to 
regulate the rate of interest existed at the time the constitution was 
adopted, and cannot, therefore, be considered either an abridgment 
or restraint upon the rights of the citizen, guaranteed by the con- 
stitution. The power to pass usury laws exists by immemorial us- 
age; but such is not the case with such acts as we are considering." 
That narrow assumptions underlie conceptions of contractual cap- 
acities also receives exemplification in connection with judicial dis- 
cussions of usury laws. For instance in Frorer vs. People,^^ the 
court said, "Usury laws proceed upon the theory that the lender 
and the borrower of money do not occupy toward each other the 
same relations of equality that parties do in contracting with each 
other in regard to the loan or sale of other kinds of property, and 
that the borrower's necessities deprive him of freedom in contract- 
ing and place him at the mercy of the lender, and such laws may 
be found on the statute books of all civilized nations of the world, 
both ancient and modern." It does not even seem to have occurred 
to Justice Scholfield that the necessities of the miner or factory 
employee might impair his freedom of contract as well. And 
instances might be multiplied, showing the purely individualistic 
character of all natural law theories, and the leg^al decisions based 
upon them. 

331. Contractual: Rights — Legal and ReaP° 

BY THORSTe;iN B. VEBIvEN 

The movement of opinion on natural-rights grounds converged 
to an insistence on the system of natural liberty, so-called. But this 

"141 111. 171. 

^"Adapted from The Theory of Business Enterprise, 271-27^. Copy- 
right by Charles Scribner's Sons (1904). 



SOCIAL-LEGAL INSTITUTIONS 677 

insistence on natural liberty did not contemplate the abrogation of 
all conventional prescription. "The simple and obvious system of 
natural liberty" meant freedom from restraint on any other pre- 
scriptive ground than that afforded by the rights of ownership. In 
its economic bearing the system of natural liberty meant a system 
of free pecuniary contract. "Liberty does not mean license ;" which 
in economic terms would be transcribed, "The natural freedom of 
the individual must not traverse the prescriptive rights of property." 
Property rights being included among natural rights, they had the 
indefeasibility which attaches to natural rights. Natural liberty 
prescribes freedom to buy and sell, limited only by the equal free- 
dom of others to buy and sell ; with the obvious corollary that there 
must be no interference with others' buying and selling, except by 
means of buying and selling. 

Presently, when occasion arose in America, the metaphysics of 
natural liberty was embodied in set form in constitutional enact- 
ments. It is, therefore, involved in a more authentic form and with 
more incisive force in the legal structure of this community than 
in that of any other. Freedom of contract is the fundamental tenet 
of the legal creed, so to speak, inviolable and inalienable ; and within 
the province of law and equity no' one has competence to penetrate 
behind this first premise or tO' question the merits of the natural- 
rights metaphysics on which it rests. The only principle which may 
contest its primacy in civil matters is the vague "general welfare" 
clause, and even this can effectively contest its claims only under 
exceptional circumstances. Under the application of any general 
welfare clause the presumption is, and always must be, that the prin- 
ciple of free contract be left intact so far as the circumstances will 
permit. The citizen may not be deprived of life, liberty, or property 
without due process of law, and the due process proceeds on the 
premise that property rights are inviolable. In its bearing upon eco- 
nomic relations between individuals this comes to mean, in effect, not 
only that one individual or group of individuals may not legally 
bring any other than pecuniary pressure to bear upon another in- 
dividual or group, but also that pecuniary pressure cannot be barred. 

Now, through gradual change of the economic conditions, this 
conventional principle of unmitigated and inalienable freedom of 
contract began to grow obsolete from the moment when it was fairly 
installed ; obsolescent, of course, not in point of law, but in point 
of fact. The machine process has invaded the field. The standard- 
ization and the constraint of the system of machine industry differs 
from what went before it in that it has no conventional recognition, 
no metaphysical authentication. The machine process has not itself 



678 CURRENT ECONOMIC PROBLEMS 

become a legal fact. Therefore it neither can or need be taken ac- 
count of by the legal mind. It does not exist de jure but de facto. 

The "natural," conventional freedom! of contract is sacred and in- 
violable. The de facto freedom of choice is a matter about which 
the law and the courts are not competent to enquire. By force of 
the concatenation of industrial processes and the dependence of 
men's comforts or subsistence upon the orderly working of these 
processes, the exercise of the rights of ownership in the interests of 
business may traverse the de facto necessities of a group or class ; it 
may even traverse the needs of the community at large, for ex- 
ample, in the conceivable case of an advisedly instituted coal famine ; 
but since the necessities or comforts of livelihood cannot be formu- 
lated in terms of the natural freedom of contract, they can, in the 
nature of the case, give rise to no cognizable grievance and find no 
legal remedy. 

D. THE COURTS AND LABOR 
332. Limitation of the Working Day for Women 

a) The Supremacy of Freedom of Contract^^ 

Does the provision in question restrict the right to contract? 
The words "no female shall be employed" import action on the part 
of two persons. There must be a person who does the act of em- 
ploying and a person who consents to the act of being employed. 
The prohibition of the statute is two fold: first, that no manufac- 
turer or proprietor of a workshop shall employ any female therein 
more than eight hours in one day ; and, second, that no female shall 
consent to be so employed. It thus prohibits employer and employee 
from uniting their minds upon any longer service during one day 
than eight hours. They are prohibited, the one from contracting 
to employ, and the other from contracting to be employed, other- 
wise than as directed. Section 2 of Article 2 of the constitution of 
Illinois provides that "no person shall be deprived' of life, liberty, 
or property without due process of law." The privilege of contract- 
ing is both a liberty and a property right. Liberty includes the 
right to acquire property, and that means the right to make and en- 
force contracts. The legislature has no right to deprive one class 
of persons of privileges allowed to other persons under like con- 
ditions. Women employed by manufacturers are forbidden to make 

"^Ritchie v. People, 115 111. 98 (1893). This is an excerpt from the 
opinion of the state court declaring unconstitutional a law providing that 
"no female shall be employed in any factory or workshop more than eight 
hours in any one day, or forty-eight hours in any one week." 



SOCIAL-LEGAL INSTITUTIONS ' 679 

contracts to labor longer than eight hours in a day, while women 
employed as saleswomen, bookkeepers, stenographers, or other 
occupations are at liberty to contract for as many hours of labor a 
day as they choose. The manner in which this section discriminates 
against one class of employers and employees, and in favor of all 
others, places it in opposition to the constitutional guarantees here- 
inbefore discussed, and so renders it invalid. 

But aside from its partial and discriminating character, this 
enactment is a purely arbitrary restriction upon the fundamental 
rights of the citizen to control his or her time and facilities. It 
substitutes the judgment of the legislature for the judgment of the 
employer and employee in a matter about which they are competent 
to agree with each other. Where the legislature thus undertakes to 
impose an unreasonable and unnecessary burden upon any one citizen 
or class of citizens it transcends the authority intrusted to it by the 
constitution, 

h) The Supremacy of the Police Power^^ 

The members of the legislature are elected from every portion 
of the state and come from every walk in life. They know from 
experience what laws are necessary to be enacted for the welfare 
of the communities in which they reside. They determined that the 
law in question was necessary for the public good, and the protection 
of the health and well-being of the women engaged in labor in the 
establishments mentioned in the act. That question was one ex- 
clusively within their power and jurisdiction. Women and children 
have always to a certain extent been wards of the state. Women in 
recent years have been partly emancipated from their common law 
disabilities. They now have a limited right of contract. They may 
own property in their own right, and engage in business on their 
own account. But they have no voice in the enactment of laws by 
which they are governed. Certain kinds of work which may be 
performed by men without injury to their health would wreck the 
constitutions and destroy the health of women. The state must be 
accorded the right to guard and protect women as a class against 
such a condition; and the law in question to that extent conserves 
the public health and welfare. On the question of the right of con- 
tract, we may well declare a law unconstitutional which abridges 
the right of adult males to contract with each other. The employer 

^^Wenham v. State, 65 Neb. 394 (1902). This is an excerpt from an 
opinion of the court declaring constitutional a law providing "that no female 
shall be employed in any manufacturing, mechanical, or mercantile establish- 
ment, hotel, or restaurant in this state more than sixty hours during any one 
week, and that ten hours shall constitute a day's labor." 



68o CURRENT ECONOMIC PROBLEMS 

and the laborer are practically on an equal footing, but this does 
not apply to women and children. Their field of remunerative 
labor is restricted. Competition for places therein 1,3 necessarily 
great. The employer who seeks to obtain the most hours of labor 
for the least wages has such an advantage over them that the wisdom 
of the law for their protection cannot well be questioned. If the 
act is the result of a fair, reasonable exercise of the police power of 
the state, it should be upheld. We are unable to find a case where 
the courts have laid down any rigid rule for the exercise of police 
power. There is little reason under our system of government, for 
placing a narrow interpretation on this power, or restricting its scope 
so as to hamper the legislature in dealing with new circumstances 
as they arise. 

' c) Maternity and State Regulations^ 

That woman's physical structure and the performance of ma- 
ternal functions place her at a disadvantage in the struggle for 
subsistence is obvious. By the abundant testimony of the medical 
fraternity continuance for a long time on her feet at work and re- 
peating this from day to day tends to injurious effects upon the 
body; and as healthy mothers are essential to a vigorous offspring, 
the physical well-being of woman becomes an object of public in- 
terest, and care, in order to preserve the strength and vigor of the 
race. 

333. Reciprocal Nature of Employer's and Employee's Rights^^ 

1. The defendants acted within their right when they went out 
on a strike. Whether with good cause, or without any cause or rea- 
son, they had the right to quit work, and their reasons for quitting 
work were reasons they need not give to anyone. And that they 
all went out in a body, by agreement or preconcerted arrangement, 
does not militate against them or affect this case in any way. 

2. Such rights are reciprocal, and the company had the right to 
discharge any or all of the defendants, with or without cause, and 
it cannot be inquired into as to what the cause was. 

3. It is immaterial whether the defendants are not now in the 
service of the company because of a strike or a lockout. 

4. The defendants have the right to combine and work together 
in whatsoever way they believe will increase their earnings, shorten 

^^Muller V. Oregon, 208 U. S. 412 (1907). It will be noted that this is 

from a decision of the United States Supreme Court. 

^*Adapted from the opinion of the court in Union Pacific Railway Co. v. 
Riief, 120 Fed. 102 (1903). 



SOCIAL-LEGAL INSTITUTIONS 68 1 

their hours, lessen their labor, or better their condition, and it is for 
them, and them only, to say whether they will work by the day or 
by piecework. All such is part of their liberty. And they can so 
conclude as individuals, or as organizations, or as unions. 

5. And the right is also reciprocal. The railroad company has 
the right to have its work done by the premium or piece system, 
without molestation or interference by defendants or others. This 
is liberty for the company, and the company alone has the right to 
determine as to that matter. 

6. When the defendants went on a strike, or when put out on 
a lockout, their relations with the company were at an end: they 
were no longer employees of the company; and the places they once 
occupied in the shops were no longer their places, and never can 
be again, excepting by mutual agreement between the defendants 
and the company. 

7. No one of the defendants can be compelled by any law, or 
by any order of any court, to work again for the company on any 
terms or under any conditions. 

8. The company cannot be compelled to employ again any of 
the defendants, or any other persons, by any law, or by any order 
of any court, or on any terms, or on any conditions. 

9. Each, all, and every of the foregoing matters between the 
company and the defendants are precisely the same, whether applied 
to the company or to the defendants. 

10. The company has the right to employ others to take the 
places once filled by defendants ; and in employing others the defend- 
ants are not to be consulted, and it is of no lawful concern to them, 
and they can make no lawful complaint by reason thereof. And it 
makes no difference whether such new employees are citizens of 
Omaha or of some other city or state. 

II. Defendants have the right to argue or discuss with the 
new employees the question whether the new employees should 
work for the company. They have the right to persuade them if 
they can. But in presenting the matter, they have no right to use 
force or violence. They have no right to terrorize or intimidate 
the new employees. The new employees have the right to come and 
go as they please, without fear or molestation, and without being 
compelled to discuss this or any other question, and without being 
guarded or picketed, and persistent and continued and objectionable 
persuasion by numbers is of itself intimidating, and not allowable. 
12. Picketing in proximity to the shops or elsewhere on the 
streets of the city, if in fact it annoys or intimidates the new em- 
ployees, is not allowable. The streets are for pubhc use, and the 



682 CURRENT ECONOMIC PROBLEMS 

new employee has the same right, neither more nor less, to go back 
and forth, freely and without molestation and without being harassed 
by so-called arguments, and without being picketed, as has a defend- 
ant or other person. In short, the rights of all parties are one and 
the same. 

334. The Danbury Hatters' Case^^ 

BY HARRY W. IvAIDLER 

In 1897 the United Hatters of North America began a national 
struggle for the closed shop. According to the Hatters' Journal, 
16 firms were unionized as the result of the boycott within a period 
of 18 months. For eleven months a vigorous boycott was waged 
against Berg & Company of Orange, New Jersey, at the cost to the 
unions of $18,000. Berg's business was reduced from 2,400 to 500 
dozen hats before he agreed to the closed shop. In April, 1901, 
Roelof & Company, of Philadelphia, were especially subjected to 
the attention of the unionists. It is estimated that the expenditure 
of $23,000 by the unionists caused Roelof a loss of some $250,000 
during the boycotting period. 

Then an effort was made to unionize the factory of D. E. Loewe 
& Company of Danbury, Connecticut. Unionists proposed a closed 
shop to Ivoewe, referring to the fate of other hatters who had with- 
stood their demands. Loewe, however, refused to concede. On 
July 25, 1902, 250 employees were called out. The shipping clerk 
was employed by the union to discover the destination of the vari- 
ous assignments. He rode on the wagons, made observations in 
the streets and at the railway stations, and reported the results to 
the union. Customers' names were immediately sent to the unions 
in whose towns the goods were to be delivered, and unionists were 
requested to write to, or call upon, the dealers and to persuade them 
to cease their dealings. Five organizers were routed among unions 
and dealers in different parts of the country. Boycott advertise- 
ments appeared in the trade and labor journals, and descriptions 
— false according to the company — of labor conditions at Loewe's 
were sent broadcast. 

The company claimed that this warfare was most effective ; that, 
during 1901, the firm made a net profit of $27,000, which decreased 
into a $17,000 net loss in 1902, after the boycott began, and into 
one of $15,000 during 1903. In 1903 the company claimed the loss 
in gross business from 17 New York firms alone was $84,700, from 

^^ Adapted from Boycotts and the Labor Struggle, 151-156, published by 
John Lane Co. (1914), and "The Supreme Court Decision in the Danbury 
Hatters' Case," in The Survey, XXXIII, 415-416. Copyright (191S). 



SOCIAL-LEGAL INSTITUTIONS 683 

26 other customers, $160,690, and from Triest, a California jobber, 
$80,000, making a total of $325,390; that the loss of gross business 
in 1902 was much less, but still very substantial. The company- 
concluded that the net damage caused by the boycott amounted to 
more than $88,000. These items, the company declared, did not 
take into consideration the normal increase in business during the 
years 1902 and 1903. 

Loewe & Company first filed a suit against the unions in the 
United States Circuit Court at Hartford, on August 31, 1903, charg- 
ing them with violating the Sherman Anti-Trust law. Various post- 
ponements carried the case along until 1907, when Judge James P. 
Piatt of the Circuit Court asked the Supreme Court of the United 
States for a ruling on the damage clause of the Sherman law.^® 
Chief Justice Fuller, who delivered the opinion in the case, Feb- 
ruary 3, 1908;'''' declared that the boycotting case came within the 
statute as a conspiracy in restraint of trade among the several states. 
On October 13, 1909, the case was brought to trial. 

Over 200 witnesses testified for the defendants, and the trial 
lasted nearly five months. In his charge to the jury. Judge Piatt, 
overstepping his authority, directed the jury to bring in a verdict 
for Loewe, requesting the jurymen to consider the question of 
damages as the "only question with which they could properly con- 
cern themselves." The jury brought in a verdict of $74,000 damages 
against the union. This amount was trebled under the triple damage 
provision of the Sherman law. Adding the costs, the total damages 
finally assessed were $232,240. 

The case, however, was appealed to the Circuit Court of Appeals 
of the Second Judicial District, on a writ of error, and on April 10, 
191 1, the judgment was reversed, the judges declaring that Judge 
Piatt had erred in taking upon himself the function of the jury, 
and in leaving to the jurymen only the question of the assessment 
of damages ; also in assuming that mere membership in the United 
Hatters' Association made a unionist responsible as a principal for 
all illegal actions of agents of the officers.^^ 

An unsuccessful effort was made to have the United States Su- 
preme Court review the case in January, 1912. A retrial of the 
case, however, was held in Connecticut, ending October 11, 19 12, 
the jury delivering a verdict of $80,000 and costs. The total award 
was $252,130. The jury took the position that the minutes, reso- 
lutions, reports, proclamations, and printed discussions which the 

^See sec. 7 of the law in Reading 214 supra. 
^"^Loewe v. Lawlor, 208 U. S. 274. 
^^Lawlor v. Loewe, 18'' Fed. 522. 



684 CURRENT ECONOMIC PROBLEMS 

officers and agents of the association publicly proclaimed and cir- 
culated among the membership were approved or warranted by 
the individual members of the association. The case was again 
appealed to the Circuit Court of Appeals, Second Circuit, which, in 
December, 19 13, confirmed the decision of the lower court. 

An appeal was taken to the Supreme Court. On January 5, 191 5, 
it reaffirmed the judgment for $252,130 against 186 Danbury hatters 
found guilty of violating the provisions of the Sherman Anti-Trust 
act.^^ The decision reaffirmed the position taken by the Supreme 
Court in 1908 that a boycott conducted by a trade union against a 
firm whose products are sold in any state other than that in which 
they are manufactured constitutes "a combination in restraint of 
trade." The primary and secondary boycott and the unfair list were 
alike condemned as coming within the scope of the act. The deci- 
sion stated: 

The circulation of a list of unfair dealers, manifestly intended to put 
the ban upon those whose names appear therein, among an important body 
of possible customers is within the possibilities of the Sherman act if it is 
intended to restrain and restrains commerce among the states. 

It requires more than the blindness of justice not to see that many 
branches of the United Hatters and the Federation of Labor to both of 
which the defendants belonged, in pursuance of a plan emanating from head- 
quarters, made use of such Hsts and of the principal and secondary boycott 
in their effort to subdue the plaintiffs in their demands. 

The main question, then, to be determined was whether or not 
the 186 members of the union whose homes and bank accounts had 
been attached had, by their actions, authorized the boycott. The 
court held that the acts could be presumed to be authorized, and 
the members of the union could be ^held liable if the latter "paid 
their dues and continued to delegate authority to their officers unlaw- 
fully to interfere with the plaintiffs' interstate commerce in such 
circumstances as they knew and ought to have known, and such 
officers were warranted in their belief that they were acting in the 
matters within their delegated authority." 

The decision declared the propriety of introducing into the 
court newspapers, and like evidence, to show that the acts were 
brought home to the defendants. 

The decision comes as a crushing blow to unionism, and especially 
to the defendant hatters, to many of whom the collection of the 
judgment will mean ruin. Whether the unfortunates will receive 
succor from the American Federation of Labor, or from the hatters' 
union, is not, at the present writing, certain. 

^Lawlor v. Loewe, 235 U. S. 522. 



SOCIAL-LEGAL INSTITUTIONS 685 

The question now uppermost in the minds of union men is. Can 
the courts similarly reach the funds of the unions under the new 
Clayton amendment? If it is found that sec. 20 of this bill does 
not protect them, a vigorous agitation on the part of labor for the 
enactment of another law exempting labor organizations from all 
prosecutions under the provisions of the Sherman act may be antici- 
pated. This decision may give a great impetus to political action on 
the part of American trade unionists. 

335. A Legal Criticism of the Injunction^" 

BY CHARLES CLAFLIN AI.I.EN 

Violation of injunction is punishable as contempt of court. 
Punishment for contempt of court is the most summary and arbi- 
trary exercise of authority under the English and American judica- 
ture. It is the reserve power inherent in every court of general 
jurisdiction to punish by fine or imprisonment, in order to maintain 
its dignity and enforce its commands; a power which is absolutely 
essential to the proper conduct of courts of justice. 

The person charged with contempt is entitled to be heard, but he 
must appear in person and not by attorney. He has no right to be 
heard by counsel, nor to trial by jury. And the trial of facts for 
contempt not committed in facie curiae is usually on affidavits. While 
in contempt of an injunction, he can not move to dissolve, nor can 
he attack the jurisdiction of the court under the original bill, nor 
file any sort of dilatory pleading whatever, till he has purged him- 
self of the contempt. In short a party to a suit may go to jail for 
contempt of a preliminary injunction issued ex parte, without notice 
to defendant, which is subsequently — and after the defendant has 
served his term of imprisonment — held to be without equity — that 
is, void. This is a tremendous power to place in the hands of one 
man; for from his judgment there is no appeal. 

And what is the purpose of issuing injunctions against great 
masses of men? What object is to be attained by making 200, or 
even 500 strikers, parties to a suit, out of a total number of many 
thousands? Personal service on more than a few, in time to make 
the writ efifective, is impracticable. Is it intended that the mere 
issuing of the writ should act in terror em over the entire body of 
men engaged in the strike? Or is it expected, by posting copies in 
public places, to establish a novel method of service by publication? 
Is the decree to serve the purpose of a mere executive proclamation, 

^"Adapted from an address published in 28 American Law Review 828 
(1894). 



686 CURRENT ECONOMIC PROBLEMS 

warning evil-doers against a continuance of their misconduct, and 
without force or vaHdity, except as a basis for invoking the mihtary 
power? Surely not. Such a construction would be a degradation 
of judicial process. Then the conclusion remains that the real pur- 
pose is to use the injunction for calling forth the power of the court 
to punish for contempt; to make of a court of equity in practical 
effect a criminal court. 

The practice of "blanket injunctions" covering large numbers of 
persons, not actual parties to the suit, and without personal service 
upon them, is indefensible. It is a general rule, as old as equity 
jurisprudence, that persons not parties to the bill are not bound by 
the decree. 

After all, what does it mean, this sudden development of equity 
jurisdiction? Whither are we tending? An injunction sued out by 
the United States against 10,000 strikers and all the world besides 
Does the injunction stop the strike? Troops are called out to aid 
the process. Do they aid it? Some scores of rioters are killed, but 
where was the injunction meanwhile? 

336. Unionism and the Conditions of Employments^ 

Included in the right of personal liberty and the right of private 
property — partaking of the nature of each — is the right to make 
contracts for the acquisition of property. Chief among such con- 
tracts is that of personal employment, by which labor and other 
services are exchanged for money or other forms of property. If 
this right be struck down or arbitrarily interfered with, there is 
substantial impairment of liberty in the long-established constitu- 
tional sense. The right is as essential to the laborer as to the capi- 
talist, to the poor as to the rich; for the vast majority of persons 
have no other honest way to begin to acquire property, save by 
working for money. 

An interference with this liberty so serious as that now under 
consideration, and so disturbing of equality of right, must be deemed 
to be arbitrary, unless it be supportable as a reasonable exercise of 
the police power of the state. But, notwithstanding the strong gen- 
eral presumption in favor of the validity of state laws, we do not 

^^ Adapted from the opinion of the court in the case of Coppage v. State 
of Kansas, 236 U.S. l (1915). A workman was discharged for refusing to 
sever his connection with a labor organization. A law of the state of Kan- 
sas, where the suit originated, forbade employers requiring of employees an 
agreement not to become or remain members of labor organizations as a 
condition of securing or retaining employment. The Kansas statute, involved 
in this case, was declared unconstitutional. 



SOCIAL-LEGAL INSTITUTIONS 687 

think the statute in question, as construed and appHed in this case, 
can be sustained as a legitimate exercise of that power. 

The act, as the construction given to it by the state court shows, 
is intended to deprive employers of a part of their liberty of contract, 
to the corresponding advantage of the employed and the upbuilding 
of the labor organizations. But no attempt is made, or could rea- 
sonably be made, to sustain the purpose to strengthen these voluntary 
organizations any more than other voluntary associations of persons, 
as a legitimate object for the exercise of the police power. They 
are not public institutions charged by law with public or govern- 
mental duties, such as would render the maintenance of their mem- 
bership a matter of direct concern to the general welfare. If they 
were, a different question would be presented. 

As to the interest of the employed, it is said by the Kansas 
Supreme Court to be a matter of common knowledge that ''Employees, 
as a rule, are not financially able to be as independent in making 
contracts for the sale of their labor as are employers in making a 
contract of purchase thereof." No doubt, wherever the right of 
private property exists, there must and will be inequalities of for- 
tune; and thus it naturally happens that parties negotiating about a 
contract are not equally unhampered by circumstances. This applies 
to all contracts and not merely to that between employer and em- 
ployee. Indeed a little reflection will show that wherever the right 
of private property and the right of free contract coexist, each party 
when contracting is inevitably more or less influenced by the ques- 
tion whether he has much property, or little, or none; for the con- 
tract is made to the very end that each may gain something that he 
needs or desires more urgently than that which he proposes to give 
in exchange. And, since it is self-evident that, unless all things are 
held in common, some persons must have more property than others, 
it is from the nature of things impossible to uphold freedom of con- 
tract and the right of private property without at the same time 
recognizing as legitimate those inequalities of fortune that are the 
necessary result of the exercise of those rights. 

It is said in the opinion of the state court that membership in a 
labor organization does not necessarily affect a man's duty to his 
employer; that the employer has no right by virtue of the relation, 
"to dominate the life nor to interfere with the liberty of the employee 
in matters that do not lessen or deteriorate the service," and that 
"the statute implies that labor unions are lawful and not inimical 
to the rights of employers." The same view is presented in the 
brief of counsel for the state, where it is said that membership in 



688 CURRENT ECONOMIC PROBLEMS 

a labor organization is the "personal and private affair" of the em- 
ployee. To this line of argument it is sufficient to say that it cannot 
be judicially declared that membership in such an organization has 
no relation to a member's duty to his employer; and therefore, if 
freedom of contract is to be preserved, the employer must be left 
at liberty to decide for himself whether such membership by his 
employee is consistent with the satisfactory performance of the duties 
of the employment. 

Of course we do not intend to say, nor to intimate, anything 
inconsistent with the right of individuals to join labor unions, nor 
do we question the legitimacy of such organizations so long as they 
conform to the laws of the land as others are required to do. Con- 
ceding the full right of the individual to join the union, he has no 
inherent right to do this and still remain in the employ of one who 
is unwilling to employ a union man, any more than the same indi- 
vidual has the right to join the union without the consent of the 
organization. Can it be doubted that a labor organization — a volun- 
tary association of workingmen — has the inherent and constitutional 
right to deny membership to any man who will not agree that during 
such membership he will not accept or retain employment in com- 
pany with non-union men? Or that a union man has the constitu- 
tional right to decline proffered employment unless the employer 
will agree not to employ any non-union man? 

And can there be one rule of liberty for the labor organization 
and its members, and a different and more restrictive rule for 
employers? We think not; and since the relation of employer and 
employee is a voluntary relation, as clearly as it is between the mem- 
bers of a labor organization, the employer has the same inherent 
right to prescribe the terms upon which he will consent to the 
relationship, and to have them fairly understood and expressed in 
advance. 

When a man is called upon to agree not to become or remain 
a member of the union while working for a particular employer, he 
is in effect only asked to deal openly and frankly with his employer, 
so as not to retain the employment upon terms to which the latter 
is not willing to agree. And the liberty of making contracts does 
not include a liberty to procure employment from an unwilling 
employer, or without a fair understanding. Nor may the employer 
be foreclosed by legislation from exercising the same freedom of 
choice that is the right of the employee. 

To ask a man to agree, in advance, to refrain from affiliation 
with the union while retaining a certain position of employment, is 
not to ask him to give up any part of his constitutional freedom. 



SOCIAL-LEGAL INSTITUTIONS 689 

He is free to decline the employment on those terms, just as the 
employer may decline to offer employment on any other; for "it 
takes two to make a bargain." Having accepted employment on 
those terms, the man is still free to join the union when the period 
of employment expires; or, if employed at will, then any time 
upon simply quitting the employment. And if bound by his own 
agreement to refrain from joining during a stated period of employ- 
ment, he is in no different situation from that which is necessarily 
incident to term contracts in general. For constitutional freedom of 
contract does not mean that a party is to be as free after making a 
contract as before ; he is not free to break it without accountability. 
Freedom of contract, from the very nature of the thing, can be 
enjoyed only by being exercised; and each particular exercise of it 
involves making an engagement which, if fulfilled, prevents for the 
time any inconsistent course of conduct. 



XIII 
SOCIAL REFORM AND TAXATION 

It is not surprising that with the passing of laissez-faire and the assump- 
tion of a larger area of control by the state, there should arise fresh interest 
in the problems of taxation. A society using means of control as varied as 
ours could not overlook so facile an instrument. Nor could it long ignore 
the vital fact that its new social responsibilities require increased expendi- 
tures, and that the field of taxation must be newly explored to discover 
sources of additional revenue. 

More than one generation of economists has fought over the question 
of whether taxation should be used as an instrument of social control. The 
advocates of "taxes for revenue only" have usually seriously routed their 
opponents, chiefly because of the nicety with which their fiscal theories have 
harmonized with general intellectual theories established upon an individual- 
istic basis. But the advocates of taxes as means of control have quite as 
seriously triumphed over their opponents in determining usual practices. 
The small town vindicates its belief in mercantilism by taxing the out-of- 
town peddler ; tax assessors very conveniently under-assess, or fail to assess, 
the property of industries which their districts are anxious to "encourage" ; 
the state attempts to shape its tax laws in such a way as to invite investment 
from other states; public sentiment demands a high excise duty on intox- 
icants as a means of decreasing their consumption ; and the nation legislates 
"prosperity" by rapid and skilful manipulation of customs duties. There is 
nothing novel in even the advocacy of the single tax as a means of correct- 
ing distribution, encouraging production, and eliminating social evils. And 
when we remember that a tax on commodities will decrease consumption, 
and are confronted by such an instance as a tax on distilleries causing a 
rapid development of technique, it is evident that we could not escape using 
this vehicle in programs of social control, even if we would. 

But whether or not the system of taxation is to be used to effect changes 
in social life and institutions, a rational use of the machinery of taxation 
must be based upon adequate knowledge. This includes, first of all, a clear 
idea of the classes or properties which we wish to bear the assessed taxes, 
and why we wish to put the burdens upon them. We must, in short, have 
principles or "canons" of taxation. In the second place, we must know the 
machinery of taxation well enough to know just how to reach the desired 
objects, assuming that they are not beyond reach. Taxes, you know, have 
a disagreeable habit of getting "shifted" ; and quite frequently their "inci- 
dence" falls upon those whom we had no intention of burdening. If we 
are taking thought for the morrow, and are concerned with increased 
efficiency of production and "equity" in distribution, we must pay particular 
attention to the incidence of taxes on the factors of production. In the 
third place, the consequences of taxation are not confined to shifting; taxes 
produce other effects than those evidenced by price changes. Such social 
consequences as business failures, greater concentration in industry, changes 
in technique, and relocalization of industries must be as accurately anticipated 
as possible. 

Today our concern is not so much with the use of taxation as a means 
of social control as of adjusting the system to the present industrial situa- 
tion and of making it yield larger and larger revenues. The first of these 

690 



PROBLEMS OF TAXATION 691 

is requiring an abandonment of the general property tax. This time-honored 
fiscal institution was admirably adapted to rural and handicraft com- 
munities; but it seems unable to reconcile itself with the varied forms of 
property which Modern Industrialism has- produced. The older methods of 
assessment are also inadequate. Small industrial units, organized as indi- 
vidual businesses, could justly be assessed by county or local officials. 
The property of huge corporations, lying in n;any counties or states, and 
much more valuable as entities than the aggregate of material properties 
would indicate, demands a more centralized system of assessment. It is 
evident, too, that to treat individuals alike is not to give them equal treat- 
ment. The old principle of assessment at a uniform rate, found in so many 
of our state constitutions, is an inheritance from the eighteenth century. 
The system, in short, must be made to conform to the newer concepts in 
which modern industrial life is expressed. 

But of greater importance is the increasing demand for revenue. We 
are being called upon to extend our educational system; to furnish to the 
people opportunities for recreation, amusement, and cultural development; 
to lighten the burden of economic insecurity; to perfect an adequate mech- 
anism of social control. These demands are constantly becoming more 
imperative. To meet them our scheme of taxes must be reconstructed. 
Customs duties and excise taxes are likely to be retained because of the 
ease of their collection. The income tax, so closely in harmony with modern 
concepts of pecuniary property, is likely to grow in favor. The corpora- 
tions are by no means immune from taxation with increasing severity. 
Increased volume of business, operation in "a stage of increasing returns," 
and lack of imperative demand for the lowering of prices together create 
an ideal condition for an increase in such taxes. But perhaps greater and 
greater dependence will be put in the inheritance tax. The yield from both 
this and from the income tax is likely to be greatly increased through 
"graduation." 

It is more than possible that "the single tax," which for so long has 
preserved its theoretical existence, will be transformed and adapted to the 
new situation. The time was when the "single-taxer" insisted that rent 
was wholly unearned, that it should be taxed at 100 per cent, and infer- 
entially that the tax should be made retroactive. It is not long since he 
was insisting that the levying of such a tax would result in the elimination 
of all our social evils. Now we are convinced that the question at issue is 
merely one of the social expediency of the private ownership of land; we 
realize that "unearned increments" may attach themselves to instruments of 
production other than land; and we have forced even the single-taxer to 
abandon the idea of retroactive taxation. Many champions of the scheme 
are now insisting upon making the rate of taxation only a fractional part 
of 100 per cent. They are no longer saying that the single tax will elim- 
inate social evils, but are insisting that it is the only adequate device which 
the state can use to secure the funds with which to eliminate these evils. 
It is in short gradually becoming "the tax on land values." As such it is 
playing its part in the solution of social problems abroad and in the_ not 
remote future is likely to take its place among our efficient devices for raising 
revenue. 

The use of such taxes, in addition to raising revenue, will involve 
profound social changes. Inheritance and property will become institutions 
quite different from those we have known. Wealth will be distributed in 
quite a different way. The forces making for social development will be 
different in content and in arrangement. Primarily designed as revenue- 
producers, these taxes will be none the less effective instruments in trans- 
forming our institutions. 



692 CURRENT ECONOMIC PROBLEMS 

A. TAXATION AND INDUSTRIAL DEVELOPMENT 
337. Expenditures and Social Organization^ 

BY HI;NRY carter ADAMS 

The aggregate of public expenditures depends, among other 
things, upon the theory of social relations which a people has 
adopted, and the degree of strictness with which that theory is fol- 
lowed in practice. This theory may be looked for in the accepted 
philosophy of the respective rights and duties of government and 
individuals, or, what amounts to the same thing, in the attitude of 
mind which the public instinctively assumes when certain social or 
industrial problems are under consideration. 

The problems of the class referred to are such as rely for their 
solution upon the extension, in some of its various forms, of the 
principle of co-operation; but a great deal depends, so far as the 
public expenditures are concerned, upon the character of that co- 
operation. Is the collective activity demanded governmental or is 
it private ? Is the co-operation desired to be secured by coercion or 
through voluntary association? One cannot emphasize too strongly 
the contrast between these two forms of social activity in their 
influence upon the aggregate of public expenditures. 

It is exceedingly difficult to express in a few words the charac- 
teristic features of the social theories which, under various forms 
and with many and constant modifications, give color to the politi- 
cal and social fabric of various states. These differences may, how- 
ever, be suggested by observing that the one theory is a modification 
of the view of the state assumed by Roman law, and exemplified in 
a general way by most of the Continental peoples; while the other 
is a development of the Teutonic and Saxon ideas of personal lib- 
erty ; and shows its most natural unfolding among peoples in English 
historical descent. The former makes the state the center of all 
collective life, and defines the rights of individuals in terms of 
national importance; the latter places the individual at the center 
of thought, and conceives of the state as one of several means to 
individual attainment and development. Under the influence of that 
philosophy which subordinates the individual to the state it is 
natural for those intrusted with the administration of the govern- 
ment to regard all questions as properly adjusted when the interests 
of the state are conserved. Especially will this be true if to such 
a theory of society there be added the influence of the monarchial 

^Adapted from The Science of Finance, 46-48. Copyright by Henry Holt 
& Co. (ir "" 



PROBLEMS OF TAXATION 693 

form of administration. It is logical, for example, that they who 
represent monarchial governments should accept the necessities of 
the state as the true measure of legitimate expenditures, without 
having very much regard for the concurrent needs of individuals. 
It is easy, also, under such a social theory, for the spirit of paternal- 
ism to show itself in many of the items of a budget, and for the 
thought that the state is an industrial corporation as well as a politi- 
cal organization to swell the proportion of public expenditures. 

The view of social relations which underlies English common 
law, on the other hand, works upon national expenditure in quite 
another manner, at least so far as those appropriations are concerned 
which minister to pride and foster bureaucracy, or which are related 
to the exercise of paternal functions. According to this theory 
a condition of liberty is conceived to be a heritage of the individual. 
The state is not regarded as an organism in the sense that it pos- 
sesses soul, conscience, and sensibilities of its own ; it is rather a 
form of association, and dififers mainly from ordinary associations 
in the character of the service it has to perform, and in the fact 
that these services are of such a sort as require the state to be the 
depository of coercive power. Public concessions are judged from 
the point of view of the interest of the individual, and are approved 
or disapproved according as they bear upon his prospects. The 
result of this philosophy of social relations among peoples who 
practice self-government is to insist that the government prove its 
case beyond the possibility of a doubt whenever it demands increased 
expenditures for approved services or the approval of expenditures 
for an unusual service. Greater reliance is placed upon voluntary 
association for the attainment of collective interests than upon 
coercive association. And this results inevitably in charging the 
cost of many lines of service to the income account of private cor- 
porations rather than to that of the state. In this manner, there- 
fore, public expenditures are curtailed by virtue of individualistic 
philosophy applied to governmental afifairs. 

338. Taxation as a Means of Social ControP 

BY ADOIvPH WAGNE;R 

The modern science of economics not only recognizes the mutual 
dependence of public and private economic activity, and their mutu- 
ally complementary character; it also renounces the optimistic view 
of the present organization of private industry, and recognizes the 

^Adapted from Finanswtssenschaft, I, paragraph 27, and II, paragraph 
159. Translated in Bullock, Selected Readings in Public Finance, 178-181 
(1883). 



694 CURRENT ECONOMIC PROBLEMS 

great evils in the system of free competition. It has come to- know 
that the organization of productive industry by private initiative, 
and the distribution of wealth which takes place upon this basis 
have a decisive social influence. It knows that through this process 
the power and relations both of individuals and of classes 
are determined in modern economic society. At the same time our 
science recognizes the influence which the state exercises directly 
and indirectly upon the distribution of wealth and position of social 
classes, by the form which its activity takes, by the manner in 
which it spends its revenues, by the kinds of taxation it adopts, and 
by the creation of public debts. 

From the knowledge of our science have developed two demands. 
In the first place, the state should so order its expenditures, tax 
system, and loans as tO' remove certain economic and social evils 
which have attended them in the past. And in the second place, 
the state, by adopting appropriate policies, should remedy evils 
which are not due to its previous action in financial and other mat- 
ters. From this second demand it follows that, in the domain of 
public finance, expenditures should increase in order to enable 
the state tO' assume new functions ; and that taxation should be em- 
ployed for the purpose of bringing about a different distribution' 
of wealth from that which would result from the action of free 
competition upon the basis of the present social order. It is the 
modern social problem which is here beginning tO' work this trans- 
formation in the science of finance. 

One who considers the present system unconditionally just, as 
the liberal school did, must logically consider the existing distribu- 
tion of wealth, which results from this order, as the only righteous 
and just distribution. This conclusion the keener thinkers of the 
school have formulated. For a person of this school the existing 
distribution of wealth is a fact admitting of no^ further discussion. 
It follows then that taxation should not alter the existing distribu- 
tion. In this view of the case, therefore, taxation should be con- 
fined to the purpose of raising sufficient revenue ; and the socio- 
political theory of taxation should be rejected. 

But, if one disputes the premises underlying the teachings of 
the liberal school, he can insist that the conclusion that the dis- 
tribution established by competition is not tO' be disturbed by tax- 
ation is not universally true. We need beside the purely fiscal theory 
of taxation, to establish a second, — the socio-political, by which a 
tax becomes something more than a means of raising revenue, and is 
considered a means of correcting that distribution of wealth which 
results from competition. 



PROBLEMS OF TAXATION 695 

339. Taxation and Technical Development^ 

BY J. R. MC CULLOCH 

It is unnecessary to travel beyond the limits of financial history 
for examples of the powerful influence of taxes in stimulating 
ingenuity and invention. Previous to 1786 the duties on spirits 
distilled in Scotland were charged according to the quantities sup- 
posed to be actually produced. But as this mode of assessing the 
duty was found to open a door to extensive frauds, it was resolved 
in its stead to substitute a license duty proportioned to the size of 
the still used by the distiller. Stills being all of the same shape, 
and the quantity of spirits that each could produce in a year accord- 
ing to its cubic contents having been accurately calculated, it was 
supposed that this plan would effectually prevent smuggling, and 
that the officers would have nothing to do but inspect the stills that 
had been licensed, to prevent their size being increased. On the 
first introduction of this apparently well-considered system, the 
license duty on each still was fixed at the rate of 30^ per gallon of 
its contents. 

The principle, however, on which the duty was assessed was 
very soon subverted. The stills in use down to this period were very 
deep in proportion to their diameter, so that after being charged they 
required at an average about a week before the process of distilla- 
tion was completed. But the new mode of charging the duty had 
no sooner been introduced than it occurred to two ingenious persons, 
Messrs. John and William Sligo, distillers, Leith, that by lessening 
the depth of the still and increasing its diameter, a larger surface 
would be exposed to the action of the fire, and they would be enabled 
to run off its contents in considerably less time. Having adopted 
this plan, they found that it answered their expectations, and that 
they were able to distil the same quantity of spirits in a few hours 
that had previously occupied a week. Messrs. Sligo kept this import- 
ant invention secret for about a year ; but it was too valuable to be 
long concealed, and the moment it transpired, the plan was adopted 
by other distillers. In consequence government raised, in 1788, the 
license duty on the still from 30.9 to £3 a gallon. 

This increase having redoubled the activity of the distillers, the 
duty was raised in 1793 to £9 a gallon, in 1795 to £18, and in 1797 
it was carried to the enormous sum of £54 a gallon. Still, however, 
the ingenuity of the distiller outran the increase of the tax ; and it 
was proved before a committee of the House of Commons in 1798 
that distillation had been carried to such perfection that stills had 

^Adapted from Treatise on Taxation, 2d edition, 151-152 (1852). 



696 CURRENT ECONOMIC PROBLEMS 

occasionally been filled and discharged once every eight minutes. 
This, it was supposed, must be the maximum of velocity, and a 
new license duty was laid on the still on the hypothesis that it could, 
at an average, be run off in that time, or that it could be filled and 
emptied once every eight minutes during the season. But the inge- 
nuity of the distillers was not yet tasked to the highest. And it 
was ascertained that, toward the latter end of the license system, 
stills of forty gallons had been, at an average, filled and run off in 
the almost incredibly short space of three minutes, being an increase 
of 2,880 times on the rapidity of distillation that had obtained when 
the license system was introduced in 1786! 

Now it will not be alleged, at least with any appearance of prob- 
ability, that had a duty of 5 or 10 per cent been laid on their income 
or capital, Messrs. Sligo would have been half so likely to make 
this important discovery. But being assessed on the still, the duty 
had the double effect of fixing attention especially on it, and of 
operating as a powerful incentive to its improvement. 

B. THE THEORY OF TAXATION 
340. Canons of Taxation* 

BY ADAM SMITH 

It is necessary to premise the four following maxims with regard 
to taxes in general : 

I. The subjects of every state ought to contribute toward the 
support of the government, as nearly as possible, in proportion to 
their respective abilities ; that is, in proportion to the revenue which 
they respectively enjoy under the protection of the state. The ex- 
pense of government to the individuals of a great nation, is like the 
expense of management to the joint tenants of a great estate, who 
are all obliged to contribute in proportion to their respective inter- 
ests in the estate. In the observation or neglect of this maxim con- 
sists, what is called, the equality or inequality of taxation. 

II. The tax which each individual is bound to pay ought to be 
certain, and not arbitrary. The time of payment, the manner of 
payment, the quantity to be paid, ought all to be clear and plain 
to the contributor, and to every other person. The certainty of what 
each individual ought to pay is, in taxation, a matter of so great 
importance that a very considerable degree of inequality, it appears, 
I believe, from the experience of all nations, is not nearly so great 
an evil as a very small degree of uncertainty. 

^Adapted from The Wealth of Nations, Book V, chap, ii, part II (1776). 



PROBLEMS OF TAXATION 697 

III. Every tax ought to be levied at the time, or in the manner, 
in which it is most Hkely to be convenient for the contributor to 
pay it. A tax upon the rent of land or of houses, payable at the same 
term at which such rents are usually paid, is levied at the time when 
it is most likely to be convenient for the contributor to pay; or 
when he is most likely to have wherewithal to pay. Taxes upon 
such consumable goods as are articles of luxury are all finally paid 
by the consumer, and generally in a manner that is very convenient 
for him. He pays them by little and little, as he has occasion to buy 
the goods. As he is at liberty too, either to buy, or not to buy, as 
he pleases, it must be his own fault if he ever suffers any consider- 
able inconvenience from such taxes. 

IV. Every tax ought to be so contrived as both to take out and 
to keep out of the pockets of the people as little as possible over 
and above what it brings into the public treasury of the state. 

341. The Burden of Taxation^ 

BY S. J. CHAPMAN 

As regards taxation, the first thing to settle is the principle 
according to which its burden should be distributed. It is commonly 
agreed at the present time that taxation should be designed so as 
to cause equal proportional sacrifice among the taxpayers. When 
there is equality of proportional sacrifice, people are left in the same 
relative positions after being taxed as before. 

This principle has been called the principle of equality of sac- 
rifice. It is better, however, to call it the principle of proportional 
sacrifice, because equality of sacrifice might be interpreted to mean 
equality of absolute sacrifice and not of proportional sacrifice. If 
the utility of income were constant and the same for all — as it is 
not — and a man with £1,000 a year and a man with £500 a year con- 
tributed £10 a year each in taxes, equal amounts of sacrifice would 
be entailed, but the man with £500 would be involved in a greater 
proportional sacrifice. The proportional sacrifice of the man with 
£500 a year would be the same as that made by a man with £1,000 
a year who paid £10 in taxes, if the former paid not £10 but £5, on 
the assumptions made as regards the utility of income. 

It is repeatedly affirmed that the right theory of taxation is the 
faculty theory. Generally speaking, the faculty theory lays it down 
that a person should pay taxes in proportion to his power to do so. 
Whether the faculty theory is the correct theory or not, according 

^Adapted from Outlines of Political Economy, 376-379. Published by 
Longmans, Green, & Co. (1911). 



698 CURRENT ECONOMIC PROBLEMS 

to the consensus of expert opinion, depends upon the exact meaning 
that we read into it. Let us take an example from a primitive com- 
munity. The state needs a particular piece of work to be done. 
Then, some say, for the whole community to turn out to do the 
work, and for each person to work according to his strength would 
be for each to contribute to the service of the state according to 
faculty. But would this be the equitable thing? If all worked ten 
days, the man of great capacity would be doing absolutely more 
for the state than the man of little capacity. But the latter would 
be making a greater proportional sacrifice than the former. He 
would be doing so because the man of great capacity, who could 
make much in a year, in yielding up ten days of his time would 
be surrendering comparative superfluities, whereas the man of little 
capacity in yielding up ten days of his time would be surrendering 
comparative necessities. The force of this argument will be more 
fully appreciated when it is put in terms of money. Equal sacri- 
fices of time are equivalent to proportional sacrifices of money 
income, but proportional sacrifices of money income are not equiva- 
lent to proportional sacrifices of real income, that is of the utility 
of income, which is the thing that ultimately counts. However, the 
faculty theory may be interpreted in such a way as to be made identi- 
cal with the theory of proportional sacrifice. 

The so-called ability theory is either the faculty theory in the 
form first analyzed above, or the theory of proportional sacrifice. 
If we mean by any theory that proportional sacrifice alone is equit- 
able, it is best to call it the "theory of proportional sacrifice" so as 
to prevent any misunderstanding. 

Taxation which embodies the principle of proportional sacrifice 
must be progressive. By the principle of progression is meant in 
general that the higher the clear net income of a person the greater 
must be the rate at which he is taxed. The need of progression is 
derived from the known facts as regards the variation of the utility 
of income with its amount. In view of the rate at which the mar- 
ginal utility of income falls, it is practically certain that taxation 
proportional to income exacts a greater proportional sacrifice from 
the poorer of any two persons, other things being equal. 

The great obstructions in the way of applying the principle of 
progression with scientific accuracy are (i) that utility varies with 
income differently for different persons, and even for the same per- 
son at different times, and (2) that the variations of utility with 
income cannot be accurately measured. 



PROBLEMS OF TAXATION 699 

C. THE INCIDENCE OF TAXATION 
342. Incidence and Industrial Organization^ 

BY A. W. FI.UX 

There is one feature connected with the selection of forms of 
taxation which is of very great importance. It is that the tax may- 
be collected from one person and its pressure be really made to rest 
on another. This can be illustrated by taking the case of a duty on 
tea imported into the country. It is somewhat obvious that the 
importer pays the duty, but that he has no intention of bearing the 
burden. He expects and, speaking generally, contrives to pass on 
the charge to those to whom he sells, who pass it on in turn till the 
final resting-place of the burden of the tax is on the consumer. 
Some increase of the burden is, in fact, generally produced in such 
a course of transference from one to another. None of the dealers 
who advance, or become responsible for, the duty do so gratuitously, 
and the charges, made as a recompense for making such advances, 
are added to the burden which the duty imposes on the consumer. 
In distinguishing between the original person who pays a tax and 
those who finally bear the burden, it is convenient to refer to the 
former by speaking of the impact of the tax, to the latter by speak- 
ing of its ultimate incidence. The incidence may or may not differ 
from the impact. Where it does differ, the tax is called an indirect 
one ; where it is the same the tax is called direct, as the levy is then 
made directly from the person who ultimately bears the burden of 
the tax. The problems connected with the determination of the real 
incidence of various forms of taxation are among the most difficult 
problems of economics. 

It is useful to examine generally the effect of taxation of the 
chief forms of income, namely, rent, interest, wages, profits. Take 
first the case of taxes on rent. Inasmuch as the amount of rent is 
not a cause of high or low price for the commodity in whose pro- 
duction the rent-yielding, agent is employed, a tax on rent is not an 
influence affecting that price. If the government, for example, claims 
10 per cent of rent, that fact does not influence the total of the 
rent or the supply of the commodity concerned. This latter is, 
presumably, already arranged on a basis calculated to yield a rent 
larger in the aggregate than either a less or greater supply would 
yield. If that be so, then 90 per cent of the rent is also greater 
for that scale of supply than that same percentage would be for 

'Adapted from Economic Principles; An Introductory Study, 281-286. 
Published by E. P. Dutton & Co. (1905). 



700 CURRENT ECONOMIC PROBLEMS 

any other scale, whether larger or smaller. Consequently, the inci- 
dence of such a tax is on the receivers of rents. The total rent 
yielded is unchanged, but the proprietors of rent-yielding property 
receive only 90 per cent of the amount instead of the whole. They 
cannot improve their position by modifying the total rent-yield, for 
anything which would add to it would have been a source of gain 
independent of the tax, and cannot, therefore, be brought into exis- 
tence by the introduction of the tax. If they adopt changes lowering 
the total of the rent-yield, they will thereby lower their share, viz., 
90 per cent of that total. Thus the burden of a tax on rent cannot 
be shifted. 

The taxation of interest stands on a very different footing. It 
reduces the yield due to ownership of capital, and thus influences 
the supply of capital. There is reason for believing that the lower- 
ing of the net yield rendered by capital to its owner would discourage 
accumulation, and thus reduce the volume of the supplies of new 
capital. This reduction of volume would modify the marginal pro- 
ductivity of capital, for the application of capital to some of the less 
productive purposes would be restrained by the scantier volume of 
new supplies. Thus the marginal productivity of capital would be 
raised in a way which reduced the total productivity of industry. 
This rise of marginal productivity would correspond to a higher 
loan-value of capital, and thus, at any rate in part, the burden of 
the tax would be shifted from the owner of the capital to its users. 
This shifting would, in the course of time, transfer the burdens to 
the consumers of the commodities in the production of which capital 
is employed, that is, practically remove the burden of the tax, on 
the revenue yielded by capital, to the consumers of goods. It is not 
contended that no part of the burden would remain on the owners 
of capital as such, or that, as consumers, they would not bear some 
part of the diffused burden, but that that chief part of the tax placed 
on owners of capital, as receivers of interest, would not permanently 
remain on that class of the community. 

If the tax on the interest does not fall equally on the interest- 
yield of all kinds of capital, there will result a preferential invest- 
ment of capital in forms which escape taxation, and an avoidance 
of taxed forms. This will tend to lower the marginal productivity 
of untaxed forms of capital and raise that of the taxed forms, till 
the net yield to the owners approaches equality. Further, if land, 
and the revenues from land ownership, remained unaffected by a tax 
which fell on revenues from capital, and no corresponding burden 
were placed on the revenues from land, land values would rise rela- 
tive to capital, and the ownership of land would gain in attractiveness 



PROBLEMS OF TAXATION 701 

from the investment point of view, so long as the rise of its value 
had not counterbalanced the freedom from taxation of the revenues 
derived from it. Inasmuch as it is practically impossible to subject 
to equal taxation the revenues from trade capital, estimated in 
money, and those derived from the use of consumption capital, 
which are, for the most part, not estimated in that form, the effect 
of taxes on interest might be, in part, to encourage the creation and 
ownership of consumption capital rather than of trade capital. 

Taxation of interest must, in practice, take the form of taxation 
of revenues derived from the ownership of capital, and is likely, 
therefore, to touch some other classes of revenue in addition to in- 
terest. 

The particular class of revenue most likely to be included with 
interest is the remuneration for risk-taking. In so far as a reduc- 
tion, in the gains derivable from undertaking the risks of industrial 
and other business operations, would operate to diminish the will- 
ingness of owners of capital to accept the risks, the taxation of 
profits would tend to divert capital and enterprise to the less risky 
openings for their employment. This would increase the competi- 
tion in such lines and operate to reduce the general return to capital 
and check the rate of accumulation. The taxation of profits, there- 
fore, except in the degree in which they proceed from monopoly, or 
from rent-yielding differential advantages in production, is not, in 
the long run, taxation the burden of which remains where it first 
fills. It is gradually diffused over the community as a whole. 

Turning to the subject of taxes on wages, the same kind of 
problem is again presented. If a reduction of the net receipts of the 
wage-earner left unchanged the amount and quality of his work, and 
had no influence on the increase of numbers seeking to earn wages, 
the burden of the tax would rest wholly on the wage-earner. He 
would, in that case, give as much and receive less, that is to say, less 
for the use of himself and family. In general, however, the influence 
of such a reduction in net remuneration would be found in a reduc- 
tion in efficiency of the worker. Thus the cost of his product would 
be raised, and some share of the tax burden thrown on other classes. 
The consumers of the goods would have to pay more for them, 
without the entire additional payment becoming available for raising 
the remuneration of the labor. A part of such increased cost of 
commodities might go to provide an addition to the laborer's wages, 
thus modifying the burden of the tax on the wages. In view, too, 
of the fact that the net remuneration of labor influences, in general, 
the rate of increase of the numbers of the population, a gradual 
modification of the supply of labor might operate, as in the case of 



702 CURRENT ECONOMIC PROBLEMS 

capital, to produce the result contemplated above, narruely, some in- 
crease of the rate paid for labor, thus reducing the net burden of 
the tax so far as the laborer is concerned, and distributing a share 
of it among other classes than wage-earners. In so far as the dif- 
fusion of the burden throws it on consumers as such, the wage-earn- 
ing classes will not escape the burden, since they include so large a 
part of the consuming public. Whether they, or other classes, will 
be most affected will turn on what kind of commodities are most 
affected. If it be commodities chiefly consumed by the wealthier 
classes, these classes, will, as consumers, bear part of the burden of 
a tax on wages. If it be commodities chiefly consumed by the wage- 
earning classes, these classes may bear as consumers part of the 
burden which they throw off as recipients of wages. 

As in the case of interest, so also in that of wages, taxation af- 
fecting special kinds of wages only will influence the distribution of 
labor in the various industries, and be a cause affecting the relation 
of the wages in taxed and untaxed employments to each other. 

343. The Burden of the Tariff Tax^ 

SEE HOW TARIFFS TAX AMERICAN WORKMEN 

The following is a list of some of the taxes which American 
workmen have to pay : 



Felt hat 


Taxed 


60 per 


cent 


Leather bag 


Taxed 40 per cent 


Matches 




35 " 




Pipe 


" 60 " •' 


Shoes 




15 " 




Tools 


" 45 " " 


Umbrella 




50 " 




Watch 


" 40 " " 


Woolen shirt 




100 " 




Leather belts 


" 40 " " 


Buttons 




20 " 




Watch chains 


" 45 " " 


Clothes 




100 " 




Collars 


" 45 " " 



IF WE HAVE TARIFF REFORM YOU WILL BE TAXED IN THE 
SAME WAY. IT MUST ALL COME OUT OF YOUR WAGES 



SEE HOW TARIFFS TAX THE CHILDREN 
IN AMERICA 

IF WE HAVE TARIFF REFORM THE TAXES WILL 
FALL ON THE CHILDREN 

The children's clothing, toys, and school things are all taxed by 
the tariffs in America. 

■^ Adapted from The Perils of Protection, a pamphlet used by the Liberal 
party in the English Parliamentary elections in 1909-10. 



A school-box 


is taxed 55 


per 


cent 


A sponge 


" " 40 


" 


" 


An exercise book 


" " 25 


" 


" 


A pen-wiper 


" " 50 


** 


** 



PROBLEMS OF TAXATION 703 

ALL BOOTS AND SHOES ARE TAXED 35 PER CENT 

See how the school things are taxed : 

A school-bag is taxed 45 per cent 

A pencil-case " " 40 " " 

A pencil " " 25 " " 

A fountain pen " " 30 " " 

See how the girls are taxed: 

A girl's woolen dress is taxed 100 per cent. 

A girl's lace collar " " 60 " " 

A girl's cloth hat " " 60 " " 

A girl's hair ribbon " " 60 " " 

See how the boys are taxed : 

A boy's suit is taxed 100 per cent A boy's cap is taxed 60 per cent 

A boy's collar " " 40 " " A boy's tie " " 50 " " 

See how the toys are taxed : 

Dolls are taxed 35 per cent Hoops are taxed 35 per cent 

Balls " " 35 " " Cycles " " 45 " 

IF YOU VOTE FOR TARIFF REFORM YOU WILL VOTE TO TAX 

THE CHILDREN. EVEN THE LITTLE ONES WILL 

NOT BE SPARED BY THE TARIFF TAXERS 



TARIFF REFORM MEANS LEGALISED ROBBERY 



Tariff reformers want to tax goods which come from abroad, so 
as to increase the price of the goods which are made at home. 
The extra cost of the goods would come out of your pockets. 

THAT WOULD BE ROBBERY 

They have this kind of taxation in Germany. What happens? 

A German economist, Dr. Lotz, has calculated that for every 
penny the German government gets from the tax on iron, the Ger- 
man ironmasters get elevenpence. 

THAT IS ROBBERY 

Germany taxes the bread and meat of her people. Dr. Gothein 
stated in the German parliament that out of every 80 j-. which the 
bread and meat taxes took out of the pockets of the German people, 
the German government only got 3^. 



704 CURRENT ECONOMIC PROBLEMS 

THAT IS ROBBERY 

If a free trade government takes money out of your pocket, it 
takes it only to pay for the necessary expenses of the government. 
Under free trade every penny taken from the people in taxes is spent 
for the people and by the people. 

A tariff reform government would take money out of your pocket 
and put it into the pockets of landlords and manufacturers. 

THAT ALSO WOULD BE ROBBERY 



THE OBJECT OF TARIFF REFORM IS TO TAX 

THE POOR MAN'S FOOD IN ORDER TO 

FILL THE RICH MAN'S POCKET 

ARE YOU GOING TO LET THEM 
344. The Incidence of the Customs Tax^ 

BY EDWIN R. A. SElvIGMAN 

The elements that enter into the equation of international de- 
mand are so numerous and so complex that an investigation of the 
actual effects of tax upon any one class of commodities would re- 
quire for its proper solution, not only an acquaintance with the details 
of the theories of the shifting of taxes, but also an intimate knowl- 
edge of all the forces influencing the supply of, and the demand for, 
the commodities affected in the two countries immediately con- 
cerned, as well as in the other countries which constitute the world- 
market. 

Among the considerations affecting the problem of the incidence 
of a tax on imports, the following are most important: (i) To 
what extent does the exporting country control the supply of the 
commodity? (2) To what extent does the importing country con- 
stitute the sole market for the commodity? (3) To what extent 
can the commodity in question be produced at home? (4) What is 
the ratio of product to cost? (5) To what extent is the demand 
elastic ? 

The imposition of the tax may be considered, in ordinary cases, 
as an addition to the cost of production, and as such increases the 
price of the article in the importing country by the amount of the 

^Adapted from The Shifting and Incidence of Taxation, 374-378. Copy- 
right by Columbia University Press (1910). 



PROBLEMS OF TAXATION 705 

duty. Under such conditions it is true that "the tariff is a tax," and 
that it falls on the consumer. The conclusion is based on the assump- 
tion that the producers do not bear any part of the tax; that, al- 
though the sales necessarily fall off more or less, according as the 
demand is sensitive or not, by reason of the increased price the pro- 
ducers find an outlet for their goods in some other country. 

The assumption, however, is not always correct. It may happen 
that the importing country constitutes either the sole market for the 
commodity, or such an important part of the market that the pro- 
ducer finds it difficult to extend his sales in other countries. To the 
extent that this is true, the producer finds it to his interest to avoid 
any substantial diminution of demand in his chief market. This can 
be accomplished, however, only by consenting to bear a portion of 
the tax himself. If the importing country constitutes the sole market 
for the commodity and if the demand is very elastic, the conditions 
are most favorable to the consumer in the importing country. But 
from this very exceptional case, where the producer bears the larger 
share of the tax, down to the ordinary case, where the consumer 
bears the whole of it, there are all kinds of gradations. 

Another very important element in the problem is the extent to 
which the home production in the importing country may fill the gap 
caused by the diminution in the imports from the exporting country. 
The ordinary reasoning that "the tariff is a tax" is based on the as- 
sumption that the equilibrium will be reached when the decreased 
supply from the foreign country sells at the increased price. If the 
home country cannot produce the article at all, this assumption is 
valid. But if the home country has hitherto been prevented from 
producing the article solely because the price has been too low to 
admit of profits, the degree to which home production can round 
out the supply depends entirely upon the extent to which the price 
rises. Suppose that an imported commodity can be produced abroad 
so as to sell in the importing country for $10.00, while the article 
can be produced in the importing country only at an initial cost of 
$12.50. If a tax of $2.00 per unit is imposed, the price will rise to 
$12.00 and the demand will fall off. But, suppose the importing 
country can now furnish part of the supply, and because of the 
larger output will be able to produce the article for $11.00. Despite 
the tax of $2.00, the price cannot rise above $11.00, the demand 
will not fall off as much as before, and the tax will be divided be- 
tween the foreign producer and the home consumer. 

The extent to which the home producer can capture a part of the 
market depends, among other things, upon the ratio of product to 
cost. If the product is produced at home under the law of increasing 



7o6 CURRENT ECONOMIC PROBLEMS 

cost, which is the usual case in competitive industries, the chance of 
the home producer is not so good; if under the law of decreasing 
cost, which as we know implies a trend toward monopoly, his chances 
are better. But it is obvious that cases may arise where it is not true 
that "the tariff is a tax" in the sense that the whole burden of the 
import duty is necessarily borne by the consumer. The greater the 
supply that is captured by the home producer, the less will be the 
proceeds of the tax. If the foreign product is entirely shut out, the 
revenue will be zero. If, in the extreme case mentioned, the home 
producer supplies the entire market at a price of $12.00, the govern- 
ment loses its whole revenue from the tax, and the consumers lose 
the entire amount of the tax through the increase in price. If, on 
the other hand, the price of the home product after the shutting out 
of foreign competition and the development of improved processes 
at home can be finally brought down to a point lower than $10.00, 
the revenue will indeed still be zero, but the consumers will lose 
nothing, and the community will have gained the advantages result- 
ing from an increase in industry. 

D. "UNSCIENTIFIC" TAXATION 
345. Defects of the General Property Tax® 

There are two reasons why the general property tax has failed 
in operation : First, because under modern conditions it cannot be 
enforced effectively; secondly, because of a more or less conscious 
recognition of the fact that strict enforcement would result in a still 
greater injustice than now prevails. 

The practical difficulties in the way of enforcing the general 
property tax are well known. Under modern conditions much prop- 
erty that is valuable to its individual owner is in a form that per- 
mits of easy evasion. The paper evidences of the ownership of 
property which the general property tax system seeks to reach in 
the hands of the owner, can readily be concealed, or there can be a 
colorable transfer of title. Credits and debts can be juggled. Visible 
personal property can be temporarily transferred into another dis- 
trict or state. Where the taxpayer makes his own return, he can 
undervalue or omit some of his property. If the assessor tries to 
inventory the property, he may overlook much of it and fail to esti- 
mate the value of that which he does find. 

'Adapted from "Report of Committee on Causes of Failure of General 
Property Tax," in State and Local Taxation, Fourth International Confer- 
ence, 307-310. Copyright by National Tax Association (1910). 



PROBLEMS OF TAXATION 707 

Then there is the ever-present feeHng which exerts a conscious 
or unconscious influence with the average administrator, that he 
drives away productive capital by the strict enforcement of laws 
which hinder the business interests of his community in competition 
with those in localities where greater "leniency" is shown. 

Public opinion almost invariably recognizes the unfairness of 
taxing all property by the same rule and at the same rate, whenever 
a strict enforcement of the law is attempted. The abstract demand 
for the taxation of all property alike then gives place to concrete 
indignation over the actual results. It is always some unknown 
"they" who ought to be made to pay on everything "they" own. But 
the property which the assessor does find often is, in the opinion of 
its owners, either greatly overvalued, or has been "singled out," or 
is otherwise quite improperly on the rolls. This attitude of the 
average property-owner is an unconscious resentment at the unfair- 
ness of the general property tax theory. The attempt to tax all 
property at a uniform standard of valuation and at the same rate, 
regardless of its special characteristics, earning power, or the benefits 
derived from the expenditures of government, violates the primary 
rules of just taxation and offends the natural sense of justice. 

The two theories of taxation most widely accepted by economists 
are : One, that each individual should be taxed in proportion to his 
ability to pay; the other, that taxes should be levied in proportion 
to benefits or privileges received from government. However the 
advocates of either theory may differ, they will agree that at least 
taxation should conform to one of these two theories in order to 
approach fairness. The general property tax conforms to neither. 
It establishes an arbitrary measure for taxation that bears no rela- 
tion either to ability to pay or to benefits received. 

Apart from these theoretical objections, there is a practical in- 
justice inseparable from strict enforcement. The fact that the real 
estate tax has been enforced regularly, has led to an amortization of 
the average tax. The rental received from real estate is gross ; there- 
fore the purchaser deducts the tax and finds the net income before 
he purchases, thus securing for his investment the current rate of 
return, tax-free. The investor in securities usually pays a purchase 
price which is fixed in a country-wide market, and is calculated on 
the assumption that the investment will escape taxation, and that 
his whole income will therefore be net. When by spasmodic en- 
forcement of the law, or disclosure of personalty in a probate court, 
securities that bear, say, 4 per cent interest are made subject to a 2 
or 3 per cent tax on their market or face value, the moral sense re- 
volts at this practical confiscation of so large a share of the income. 



7o8 CURRENT ECONOMIC PROBLEMS 

In the case of tangible property such as merchandise, the results 
of general evasion are similar. Selling prices are fixed on the as- 
sumption that the business will largely, if not wholly, escape taxa- 
tion. The few merchants who are caught find themselves taxed out 
of all proportion to others, and are unable to recoup themselves for 
the tax by adding to prices, because of the competition with those 
who escape, or with non-residents — who may be wholly relieved from 
such liability in their own states. 

To sum up, your committee finds : 

That the general property tax system has broken down. 

That it has not been more successful under strict administration 
than where the administration is lax. 

That in the states where its administration has been the most 
stringent, the tendency of public opinion and legislation is not toward 
still more stringent administration, but toward a modification of the 
system. 

That the same tendency is evident in the states where administra- 
tion has been more lax. 

That the states which have modified or abandoned the general 
property tax show no intention of returning to it. 

That in the states where the general property tax is required by 
constitutional provisions, there is a growing demand for the repeal 
of such provisions. 

We conclude, therefore, that the failure of the general property 
tax is due to the inherent defects of the theory ; that even measurably 
fair and effective administration is unattainable; and that all at- 
tempts to strengthen such administration serve simply to accentuate 
and to prolong the inequalities and unjust operation of the system. 

346. Multiple Taxation^" 

BY THEODORE SUTRO 

No one doubts the fact of double and multiple taxation in our 
system, but nevertheless it will be useful to point out some concrete 
examples. 

Certain logs, cut on lands in Wisconsin owned by a Minnesota 
corporation, were hauled to a river and piled on the ice to await the 
opening of the river, that they might be floated down to Minnesota 
to be there manufactured into lumber. Under a statute of Wiscon- 
sin these logs were assessed in the month of April for taxation for 

^"Adapted from "Double and Multiple Taxation," in State and Local 
Taxation, Second International Conference, 548-552. Copyright by National 
Tax Association (1909). 



PROBLEMS OF TAXATION 709 

the year commencing on the last Monday in June, on the claim that 
the situs of the logs was in Wisconsin. It appears that under a law 
of the state of Minnesota the same logs were also assessed against 
the Minnesota corporation, and taxed there for part or all of the 
same period. The Wisconsin court admitted that this would result 
in double taxation of the same article in the same year and said: 
"Either it is lawful to tax the logs in Wisconsin or it is not. If 
lawful at all, the mere circumstance that the owner, after the tax is 
levied, voluntarily takes them into another state, where they are 
also taxed, can have nothing to do with the question of the constitu- 
tionality of the tax here."^^ 

Here is a flagrant case of double taxation, but we may go farther. 
Let us assume that the Minnesota corporation had a permanently 
established agency in the city of New York, and that it sent these 
logs, subsequent to their taxation both in the states of Minnesota 
and Wisconsin, to the city of New York, where they would arrive 
before the tax period of Wisconsin and Minnesota had expired, and 
would, within that period, reach and be in the city of New York on 
the subsequent second Monday of January. They would thereupon 
become taxable for the third time in the city of New York. 

Let us assume further that subsequently, say in the month of 
March, they were sawed into lumber in the state of New York, and 
were in or about the month of April shipped to another agency of 
the same Minnesota Corporation, in the state of New Jersey, and 
that this lumber was in the hands of the New Jersey agency on the 
twentieth day of May, on which date assessments for taxation are 
made in that state. 

We should then have this result: that these logs were assessed in 
Wisconsin for the whole period of one year from the last Monday 
of June, for nearly the whole of that period also in the state of 
Minnesota, from the period from at least the second Monday in 
January until the last Monday of June also in New York, and from 
the period from the twentieth of May until the last Monday of 
June in New Jersey. 

On the other hand, a competing Wisconsin corporation or indi- 
vidual growing and cutting these logs into lumber in that state and 
disposing of this lumber before the expiration of a year from the 
last Monday of June would have been taxed for the logs or their 
equivalent in lumber only a single time for the same tax period, for 
which the Minnesota corporation would have been taxed four times. 

^^C. N. Nelson Lumber Co. v. Town of Loraine, 22 Fed. 54 (1884). 



7IO CURRENT ECONOMIC PROBLEMS 

Certain mortgages on lands in Oregon held by a California cor- 
poration were taxed in Oregon, under an Oregon statute, which pro- 
vided that "mortgages of land shall for the purpose of assessment 
and taxation be deemed to be real estate." Under the laws of Cali- 
fornia the same mortgages were taxable against the California cor- 
poration for a part of the same period.^" This illustration also we 
might carry farther by assuming that before the tax period in Cali- 
fornia had expired the mortgages had been assigned by the Cali- 
fornia corporation to a resident of New York City. If held by that 
resident on the second Monday of January in the city of New York, 
the same mortgages would have been subject to another tax for the 
same tax period. 

Money had been loaned by a resident of Kentucky to a firm in 
Ohio. It was taxed in both states. The court said : "Borrowed 
capital in Ohio is taxable as the borrower's property there, and the 
debt due to the lender in Kentucky is taxable here as her property" 
(i. e., the property of the minor daughter of the deceased lender). 
"In this case, the ward's right to the money in Ohio is a portion of 
the wealth of Kentucky, and ought to contribute to the burdens of 
the government which protects her ; and if it could escape contribu- 
tion by lending it in Ohio, a knowledge of that fact would encourage 
the exhaustive deportation of the money of Kentucky to augment 
the wealth of some other state."^^ 

E. TENDENCIES IN TAXATION 
347. The Massachusetts Corporation Tax^* 

In Massachusetts there is general provision for the taxation of 
corporations upon their "corporate excess." Although experience 
has shown that each class of corporations requires special treatment, 
and many modifications have been made, the central idea — corporate 
excess — is preserved throughout. 

In ascertaining the corporate excess, this general provision re- 
quires an annual return by the corporation to the tax commissioner 
showing the amount and market value of its capital stock and assets, 
and also the names of the stockholders, with their holdings and 
addresses. He estimates the entire value of the capital stock from 
this return. This estimate is denominated the value of the "cor- 

^^ Johnson v. De Bary-Baza Merchant's Line, 2i7 L.R.A. 518; Savings and 
Loan Soc. v. Multnomah County, 60 Fed. 31 (1894). 

^^Thomas v. Mason Co., 67 Ky. 135 (Court of Appeals, 1868). 

^^Adapted from the Report of the Commission of Corporations on the 
Taxation of Corporations, I, 89-93 (1909). 



PROBLEMS OF TAXATION 711 

porate franchise." Deduction is made for the value of real estate 
and machinery taxed locally, and the remainder, called the "corpo- 
rate excess," is taxed at the average rate of taxation for the whole 
state during the last three years. 

Such proportion of the tax collected by the state as corresponds 
to the amount of stock owned within the state is returned to the 
towns and cities in which the stockholders reside, in proportion to 
the number of shares there owned. The portion of the. tax which 
represents the tax on shares of stock held outside the state goes to 
the state. Under this arrangement it is estimated that about 20 per 
cent of the tax accrues to the state. Shares in domestic corporations 
are not taxed to their owner as personal property. Bonds are 
taxable. 

"Business corporations" were originally included under the tax 
on corporate excess above described ; but owing to the effect of that 
tax in compelling Massachusetts corporations to give up their char- 
ters and incorporate under laws of other jurisdictions, it was found 
necessary to place limitations on the assessment of the corporate 
excess of such corporations. In 1903 "An act relative to business 
corporations" was passed, which law relates particularly to manu- 
facturing and mercantile corporations as distinguished from financial 
and transportation and transmission corporations. 

This law provides that domestic corporations having capital stock 
and established for the purpose of carrying on business for profit be 
taxed as follows : The corporation makes an annual return to the 
Tax Commissioner, from which he estimates the entire value of 
capital stock and this is denominated the value of the corporate 
franchise. There is a deduction of the value of real estate and 
machinery subject to local taxation within the state, and also of the 
value of property which is in another state or country and is subject 
to taxation therein. No deduction is made for securities which would 
be taxable if owned by a resident natural person, but if such securi- 
ties would not be taxable in the hands of a natural person they are 
deducted. On the net valuation or corporate excess thus reached 
the state directly imposes a tax at the average rate of all the cities 
and towns in the state for the last three years. The tax, however, 
is not to exceed a tax at this rate on an amount 20 per cent in excess 
of the value of the real estate, machinery, and merchandise, and 
taxable securities ; nor is it to be less than one-tenth of i per cent of 
the market value of the capital stock. The tax is paid by the domes- 
tic corporation to the state treasurer. The return also gives a list 
of stockholders, with their holdings and addresses. 



712 CURRENT ECONOMIC PROBLEMS 

The Tax Commissioner in determining the value of the corporate 
franchise of a business corporation may not take into consideration 
any debts of the corporation, unless the returns contain a sworn 
statement that no part of such debt was incurred for the purpose of 
reducing the amount of taxes. 

Beginning with 1909, all of the tax apportioned to non-resident 
stock remains with the state and the rest of this tax is^ distributed, 
one-half to the cities and towns where the tangible property of the 
corporation is located and the other half to the cities and towns 
where the stockholders live. Shares in companies paying this tax 
are not taxed to the owner as personal property. Bonds of these 
companies are so taxed. 

The tax upon railroad companies is on the same basis as the tax 
on corporations generally, namely, "corporate excess." Provision 
is made for a proportionate assessment of the tax where the line of 
the road extends outside the state. Every railroad corporation or- 
ganized in the state returns a complete list of its stockholders, with 
residences and number of shares, and also a statement in detail of 
the works, structures, real estate, and machinery owned by the cor- 
poration and subject to local taxation, with location and value. 
Every railroad corporation, whether organized in this state or else- 
where, returns a statement of the whole length of its lines, and of 
so much of the length of its lines as is outside the state. 

The Tax Commissioner ascertains from the returns or otherwise 
the true market value of all shares of every railroad corporation, 
which shall be taken as the true value of its corporate franchises. 
From this is deducted, in the case of both foreign and domestic cor- 
porations, so much of the value of its capital stock as is proportional 
to the length of that part of its lines, if any, lying without the state, 
and also the value of its real estate and machinery subject to local 
taxation within the state, for which purpose the assessed value may 
be taken as the true value. Upon the valuation so found the railroad 
pays to the state a tax at the average rate throughout the state. 

No taxes are assessed locally upon the shares of any railroad 
which pays a tax on its corporate excess. Such proportion of the 
tax collected of a railroad corporation as corresponds to the pro- 
portion of its stock owned by residents of the state is distributed 
to the towns in which such owners respectively reside. Bonds of 
railroad companies are taxable to the owner as personal property. 



PROBLEMS OF TAXATION 713 

348. The Federal Income Tax^^ 

BY EDWIN R. A. SE;IvIGMAN 

The enactment of the income-tax law of October 3, 1913, marks 
a new stage in the history of American finance. The American tax 
was designed from the very outset as an integral and permanent 
part of the fiscal arrangements. 

The chief argument which was responsible for the passage of 
the Sixteenth Amendment and for the enactment of the law was that 
wealth is escaping its due share of taxation. Again and again in the 
course of the discussion attention was called to the fact that our 
federal system of taxes on expenditure puts an undue burden on the 
small man; and when the objection was made that the principle of 
ability to pay is recognized in state and in local taxation, the ready 
answer was found that in actual practice our state and local revenue 
systems fail almost completely to reach those taxpayers who can 
best afford to contribute to the public burdens. 

Under the provisions of the statute the tax is imposed upon the 
entire income of every American citizen, whether residing at home 
or abroad, as well as upon that of every person residing in the United 
States although not a citizen thereof. In the case of non-citizens of 
the United States residing abroad, the tax is assessed upon the in- 
come from all property owned, and from every business, trade, or 
profession carried on, in the United States. 

The law applies not only to individuals but to corporations. The 
income tax is payable by every corporation, joint-stock company, or 
association, and every insurance company organized in the United 
States, with a few exceptions. 

It is easy to say that income should be taxed, but it is not so easy 
to define what is meant by income. The law of 1913 states that net 
income shall include gains, profits, and incomes derived from sal- 
aries, wages, or compensation for personal services of whatever 
kind, and in whatever form paid; or from professions, vocations, 
businesses, trade, commerce, or sales or dealings in property, whether 
real or personal, growing out of the ownership or use of, or inter- 
ests in, real or personal property ; also from interest, rents, dividends, 
securities, or the transaction of any lawful business carried on for 
gain or profit, or gains or profits and income derived from any source 
whatever, including the income from, but not the value of, property 
acquired by gift, bequest, devise, or descent. 

^® Adapted from "The Federal Income Tax," in the Political Science 
Quarterly, XXIX, 1-4, 11, 13-18. Copyright (1914)- 



714 CURRENT ECONOMIC PROBLEMS 

In discussing the question of tax rates the two chief problems 
are those of exemption and of graduation. 

The most important point to be noted under the head of ex- 
emption is the fact that the tax apphes to individual incomes only 
when they exceed $3,000. In this bill, as originally drafted, the 
exemption was put at $4,000. In the course of the discussion, how- 
ever, and partly as a concession to the feeling that the limit was ex- 
cessive, it was reduced to $3,000, with additional exemptions of $500 
or $1,000 for children. In the final draft, while the figure of $3,000 
was retained, the exemption for children was eliminated and was 
replaced by an additional exemption of $1,000 for a married couple. 
A total exemption, however, of $4,000 only is permitted in the case 
of aggregate income of husband and wife when living together. It 
is to be noted, moreover, that the exemption applies to the first three 
or four thousand dollars respectively of any amount of income ; that 
is to say, three or four thousand dollars respectively are always to 
be deducted from the net income, in order to reach the taxable in- 
come. 

The consideration of tax rates involves not only the question of 
exemption, but that of graduation. It is significant that the principle 
of progressive taxation evoked almost no discussion. The legiti- 
macy of the theory was taken for granted. In considering the ques- 
tion of graduation, only two difficulties confronted the framers of 
the bill. The one was how to make a workable system of progressive 
taxation harmonize with the administrative methods employed; the 
other how to oppose with success the demands of the radicals. 

The former difficulty is connected with the principle of stoppage 
at source, to be discussed below. It is clear that if a tax is paid at 
the source by the income-payer, rather than by the income-recipient, 
it is not easy to introduce a graduated scale. The bonds of a cor- 
poration, the tax on the income of which is withheld by the corpo- 
ration, may be owned by a person of very small or of very large 
total income. 

This problem had, however, recently been solved in England, 
where a uniform rate is imposed upon all taxpayers, and is assessed 
on the principle of stoppage at source. This remains the backbone of 
the tax. Then on all individual incomes above a certain figure, a 
so-called super-tax is levied upon the income as a whole. The same 
plan has been adopted in the new American law. The uniform tax 
levied upon all incomes, primarily by the method of stoppage at 
source, is called the normal tax, and is assessed at the rate of 1 per 
cent. The extra tax is called the additional tax or surtax and is 
assessed on the entire income of individuals, according to a graduated 



PROBLEMS OF TAXATION 



715 



scale. The advantage of this ingenious scheme is that the constit- 
uent parts of the income of any individual will be reached in large 
measure by the normal tax, and in such a way that the government 
will be able to ascertain the facts. The returns made by individuals 
for the additional tax can, to a considerable degree, thus be checked 
up, and the fiscal interest of the government be protected. The pro- 
tection is, however, not complete; for, the principle of stoppage at 
source does not apply to all incomes within the United States, and 
implies only in an imperfect way to incomes received abroad. To a 
very large extent, however, the protection is undoubted. Thus it 
may be said that the old problem of the incompatibility of graduated 
taxation with stoppage at the source has been attacked with a fair 
prospect of success. 

The other difficulty with which the framers of the bill had to 
cope was the danger of an exaggerated application of the progressive 
scale. In the original bill, the clause relating to the "additional" tax 
was so framed as to impose i per cent on incomes from $20,000 to 
$50,000, 2 per cent on incomes from $50,000 to $100,000, and 3 per 
cent on incomes above $100,000. In the course of the discussion, 
however, many amendments were introduced calling for much 
higher scales. The general feeling was that the graduated scale 
contained in the bill was not high enough. For instance, Senator 
La Follette proposed a scale which ran up to 10 per cent. As a re- 
sult of the discussion the Finance Committee of the Senate saw 
that some concession was inevitable. Under the law as it was 
finally enacted, the rates of the "additional" tax are as follows : 



Per cent 


On Amount Exceeding 


And Not Over 


I . . . 




$ 20,000 


$ 50,000 


2. . . 




50,000 


75,000 


3--- 




7S,ooo 


100,000 


4... 




100,000 


250,000 


$■■■ 




250,000 


500,000 


b... 




500,000 





The maximum rate of the income tax as a whole, therefore, under 
the new law, is somewhat under 7 per cent. This is somewhat lower 
than either the English maximum or that of the recent German 
Wehrsfeuer. 

The provisions in the new law which deal with the methods of 
assessment and collection involve a fundamental departure from the 
theory of all preceding income taxes in the United States. As 
has been frequently pointed out, the two chief types of income tax 



7i6 CURRENT ECONOMIC PROBLEMS 

are the personal or lump-sum tax, where everyone is compelled to 
make a return of his entire income from whatever source derived, 
and the stoppage-at-source tax, the theory of which is that it should 
be collected from the person or agency paying the income, rather 
than from the individual who receives it. The argument in favor 
of payment at source is the double one of protecting the honest 
taxpayer, and of safeguarding the interests of the Treasury. There 
is little doubt that a purely personal lump-sum income tax resting 
primarily on the declaration of the individual would be as much of 
a failure in the United States as was the original income tax in 
England or the American income tax in the years subsequent to the 
Civil War. It was to avoid these evils that England adopted the 
principle of stoppage at source to a certain extent at least, and that 
some other countries have in a minor degree followed this example. 
It was reserved, however, for the United States to apply the prin- 
ciple in a more thoroughgoing fashion than is the case anywhere else. 
The law provides that "all persons or firms, co-partnerships, 
companies, corporations, joint-stock companies or associations, in 
whatever capacity having control, receipt, disposal, or payment of 
fixed or determinable annual or periodical gains, profits, and income 
of another person, subject to tax" are required to deduct and with- 
hold the annual tax of i per cent from all "interest, rent, salaries, 
wages, premiums, annuities, compensation, remuneration, emolu- 
ments, or other fixed or determinable annual gains, profits, and in- 
come of another person exceeding $3,000 for any taxable year." In 
the case of payment of interest on bonds and mortgages or of trusts 
or similar obligations of corporations, as well as in the case of col- 
lections of interest and dividends on foreign bonds and stocks not 
payable in the United States, the tax is to be deducted on all sums 
irrespective of whether or not the payments amount to $3,000. The 
obligation to withhold the tax is not applicable to three cases. First, 
it does not apply to the dividends on the stock of corporations for 
the reason that all such corporations are subject to the tax on their 
net income, irrespective of whether they pay out this income as divi- 
dends or allow it to accumulate as surplus and undivided profits. 
Secondly, the obligation to withhold the tax does not apply to the 
interest on bonds, mortgages, equipment-trust, receivers' certificates, 
or similar obligations of which the bona fide owners are citizens of 
foreign countries and residing abroad. Thirdly, it does not apply to 
the payments to a corporation, the reason for this obviously being 
that all corporations are required to file a complete return of all of 
their income, and that the books of the corporation are open to in- 
spection by the revenue authorities. 



PROBLEMS OF TAXATION 717 

349. Public Capitalization of the Inheritance Tax^^ 

BY ALVIN S. JOHNSON 

There are new burdens to be assumed, and tremendous ones, just 
over the present horizon of the state. Pensions for the superan- 
nuated and disabled, relief for the sick, reformation of the outcast, 
subsidies for indigent motherhood, conservation of child life and 
of the human resources we now neglect through parsimony in educa- 
tional effort are among the burdens which the state will in the end 
be forced to assume. Whether we approve or disapprove of the state 
assum,ption of responsibilities of this nature, as dispassionate ob- 
servers of historical tendencies we are compelled to admit that in 
every modern state the party of "social reform" is making rapid 
headway. There is in the existing social constitution no opposing 
force powerful enough to prevent the ultimate realization of part, 
if not of the whole, of the program of the social reformers. With 
the new fiscal burdens that will have to be assumed, new sources of 
revenue must be found, or old sources must be made jnore fruitful. 
It is a realization of this situation that fixes the eye of the democracy 
upon the vast mass of wealth passing each year from the able hands 
of its accumulators to the hands of all but passive heirs. What 
profit shall the democracy fix for itself on death's turnover? 

To Adam Smith and his immediate successors the inheritance tax 
presented one serious defect : it is an unthrifty tax, falling, not upon 
"revenue," but upon capital, and hence tends to deplete the national 
stock of parent wealth. If this view of the matter is valid, the prog- 
ress of inheritance taxation as a source of ordinary revenue cannot 
be regarded as an unmixed good. Admitting, as we must, that the 
maintenance of the capital stock is not in itself the highest end of 
social policy, and that we must at times accept capital depletion as 
the legitimate cost of a higher good, we are yet not justified in over- 
looking the fact that the dissipation of accumulated capital is a social 
cost which should be reduced to a minimum, so far as this is possible. 
This point, I assume, scarcely needs argument, as the social-eco- 
nomic value of thrift is one of the best-established values of economic 
theory. 

The inheritance tax rests upon the entire mass of wealth, includ- 
ing that which originates in unearned increment as well as that which 
originates in saving. But the state does not take from a given in- 
heritance proportionate shares of the lands, reproducible goods, 

'^^ Adapted from "Public Capitalization of the Inheritance Tax" in the 
Journal of Political Economy, XXII, 160-180 (1914). 



7i8 CURRENT ECONOMIC PROBLEMS 

franchises, and other privileges that compose it. The pubHc author- 
ity demands money,- and this is drawn, in one way or another, from 
liquid capital. The whole of the inheritance tax, then, is paid out of 
the fund of fluid, mobile capital, which is the sole financial basis of 
the goods which conserve or increase our productive equipment — 
the fund of which it may properly be said that it originates in saving. 

With rates of inheritance taxation so light and accumulations so 
large as they are in most of our states, the tendency of such taxes 
to trench upon accumulated capital may be almost negligible. But 
it would be hazardous to assume that accumulation in the United 
States can continue indefinitely at the present rate. " Our large sav- 
ings from income may be explained, in part at least, by economic 
conditions which are manifestly transitory. Our working class, re- 
cently transplanted from a less fertile economic field, secure incomes 
in excess of their accustomed needs, and accordingly have a surplus 
for accumulation. Our men of wealth, newly enriched, have not, 
as a class, acquired the art of luxurious consumption. Their in- 
comes outrun their expenditures, and the surplus accumulates with- 
out active effort on their part. New opportunities presented by na- 
ture or created by society have always been available and have served 
as an additional stimulus to thrift. One cannot gain title to a home- 
stead, one cannot seize and exploit coal lands or street-railway fran- 
chises, without the control of funds accumulated from income. 
Rarely, in a rapidly developing economic state, is it possible for an 
entrepreneur to draw from pre-existing funds all the capital requisite 
to a full exploitation of his opportunities. He must supplement the 
funds which he already owns and those which he can borrow with 
funds saved from his current income, if he is unwilHng to forego 
many chances of great profit. ''Unearned increment" thus serves 
as a premium upon thrift. 

• As our economic conditions become more settled the unearned 
increment loses much of its potency as a stimulus to thrift. Further- 
more, our laborers are raising their standards of living and our 
capitalists are learning the ways of a society which knows how to 
spend its income. How soon the rate of accumulation will begin 
to decline, and how rapid the decline will be, we need not attempt 
to predict. For our present purpose it is sufficient to point out that 
a tax rate which would today absorb 20 per cent of our annual accu- 
mulations would absorb a much larger percentage of the annual ac- 
cumulations of, say, 1964. 

Granted, then, that the evil of unthrifty inheritance taxes is 
negligible at the present time, when the taxes are light and the rate 
of accumulation is high. Such taxes, nevertheless, are destined to 
become heavier and the rate of accumulation is destined to become 



PROBLEMS OF TAXATION 719 

less. The evil, obviously, is one which has the capacity of growing 
into importance. 

If the inheritance tax is indeed affected with the vice of unthrift 
and if the defect may lead to such serious consequences as have been 
indicated, it might be thought to be a part of wisdom to abandon the 
tax altogether, or to restrict it to so narrow a range that its power 
of destroying accumulated,, capital would be negligible. To propose 
such a restriction of the tax, however, would be idle, in view of the 
powerful social and political forces to which its development re- 
sponds. Economists may urge the necessity of capital conservation, 
but the democracy will be slow to recognize such necessity, so long 
as the alternative to a policy of public dissipation of capital is the 
perpetuation of vast private estates. Must we accept this alterna- 
tive? There seems to be no good reason why we should. There 
is nothing in the nature of the state which requires it to assume the 
role of a prodigal heir who squanders his inheritance upon current 
needs instead of administering it prudently with a view to its future 
increase. The state can adopt the sanie policy which every prudent 
person recommends to the private heir. It can treat capital acquired 
through inheritance as a fund to be maintained intact. Let the state 
set apart, as a permanent investment fund, the proceeds of all inheri- 
tance taxes, and depletion of the natural capital will at once cease. 

The public capitalization of the inheritance tax would tend to 
conserve the national stock of productive wealth. It is a policy that 
would encounter no insuperable administrative difficulties ; it would 
not seriously prejudice the interests of the private investor. Po- 
litically and socially such a policy, if it has potentialities for evil, 
would appear to have far greater potentialities for good. 

There is manifestly nothing revolutionary in principle in a capital 
fund owned and managed by the state for the benefit of a particular 
public service. Public and semi-public endowment funds now in 
existence in this country amount, in the aggregate, to an imposing 
sum. We are living in an epoch in which the funded endowment is 
employed with growing frequency. There is an increasing reluc- 
tance on the part of private donors to contribute funds merely for 
current expenditures ; there is an increasing tendency on the part of 
public and semi-public institutions to transform extraordinary cur- 
rent receipts into permanent endowment. Not on principle, then, 
can a plan of the permianent endowment of a public service be 
treated as revolutionary. If there is anything revolutionary in the 
plan, it must consist solely in the magnitude of the operations that 
it would entail. 

Defenders of an economic system based upon the principle of 
private property must admit that at two points their position is de- 



720 CURRENT ECONOMIC PROBLEMS 

cidedly weak: the private enjoyment of funded income, and the 
private burden upon the worker of mischances against which it is 
impossible for him to make provision. The private recipient of an 
absolutely secure funded income is freed from the necessity of ex- 
ercising the skill and foresight which serve, in general, as an ethical 
basis for the defense of private property. The active manager of an 
industrial capital finds his position morally weakened by the fact 
that his property income is assimilated, in the social consciousness, 
to that of the functionless "remittance man." However much we 
may approve of the policy of throwing upon each able-bodied man 
the responsibility for finding means of self-support, we must admit 
that hundreds of thousands of our workingmen are exposed to 
chances against which they can make no adequate provision. For 
hundreds and thousands of our city workers, the only escape from 
an indigent old age is premature death. For hundreds of thousands 
of families, the death of the chief breadwinner means the maiming 
of children's lives almost past recovery. A system which permits 
such evils is surely not free from moral weakness. Now, the general 
tendency of the policy which I propose is to divert to the state part 
of the funded income of society from the private recipients in whose 
hands it subserves no useful purpose, and to charge upon it precisely 
those burdens by which the weak are now crushed. Not by the 
rough method of expropriation, however, but by a method which is 
legal as well as ethical, and which entails no sacrifice of the future to 
present gain. The public capitalization of inheritance taxes would 
result in an accumulation of funds which would be gradual, and it 
would hence leave opportunity for the development of efficient 
means of administration. Under this plan public accumulations 
would constantly increase ; but their increase could never become so 
great as to restrict the field of private property unless private accu- 
mulations should come to a standstill and opportunities for private 
exploitation should fail. 

F. THE SINGLE TAX 
350. The Increase in Land Values 

a) Land Values in the Fifteenth Century^'^ 

BY THEROI.D ROGKRS 

During the fifteenth century, notwithstanding the difficulties and 
losses of the lahdowner, the value of land rose rapidly. In the four- 
teenth century it was constantly obtained for ten years' purchase, 

"Adapted from Six Centuries of Work and Wages, 287. 



PROBLEMS OF TAXATION 721 

the amount of land in the market being probably so abundant, and 
the competition for its purchase so slight, that it easily changed 
hands at such a rate. Land was valued at twenty years' purchase 
in the middle of the fifteenth century. 

h) Rents in the Sixteenth Century 

BY HUGH IvATlMER 

Land which went heretofore for twenty or forty pounds a year 
now is lent for fifty or a hundred. My father was a yeoman, and 
had no lands of his own, he had a farm at a rent of three or four 
pounds by the year at the uttermost ; and thereupon he tilled so 
much as kept half a dozen men. He had walk for a hundred sheep, 
and my mother milked thirty kine. He kept me to school ; he mar- 
ried my sisters with five pounds apiece, so- that he brought them up 
in godliness and fear of God. And all this he did of the same farm 
where he that now hath it payeth sixteen pounds rent or more by 
the year, and is not able to do anything for his prince, for himself, 
nor for his children, nor to give a cup of drink to the poor. 

c) The Poiver of Landlords^^ 

BY THOMAS SPE^NCE; 

And any one of them (the landlords) still can, by laws of their 
own making, oblige every living creature to remove off his prop- 
erty ; SO', of consequence, were all the landholders to be of one mind, 
and determine to take their own properties into their own hands, 
all the rest of mankind might go to heaven if they would, for there 
would be no place found for them here. Thus men may not live in 
any part of this world, not even where they are born, but as strang- 
ers, and by the permission of the pretender to the property thereof. 

d) The Influence of Rent on Trade and Comnierce^^ 

BY A. O'CONNOR 

What are the circumstances under which manufacturing indus- 
try is carried on in this country in respect of the use of land? With 
the falling in of leases so much higher a ground rent is charged 
that even with an increase of business there is less profit. Not onl}' 

^^From a lecture delivered before the Philosophical Society of Newcastle 
in 1775. Quoted in Wallace, Studies Scientific and Social, II, 435. 

^^ Adapted from Special Report of the Royal Commission on the Depres- 
sion in Trade and Industry (1885). 



722 CURRENT ECONOMIC PROBLEMS 

in London does the amount paid for the occupation of ground bear 
a higher proportion to the profits of trade than it formerly did, but 
in Birmingham too, where trade prices have been lowered, profits 
reduced, and wages are less, and where there are large numbers of 
persons vainly seeking employment, the price which has to be paid 
for the use of land has increased. The evidence on this point from 
Sheffield, again, was of the clearest; and it was shown that in Jar- 
row, which the shipbuilding industry may be said to have created, 
the landowners draw from the earnings of the industrial classes an 
immense income in consideration of the occupation of ground the 
improvement in the value of which is in no way attributable to them. 
And so of other places. As in the agricultural and mining districts, 
so in the industrial and manufacturing centres, the amounts which 
have to be paid for the use of land constitute a burden upon indus- 
try which is constantly becoming heavier, both absolutely and rela- 
tively. It thus appears that over the entire country there is a cause 
at work — general, permanent, and far-reaching — affecting every 
branch of industry, in mine, and farm, and factory, the efifects of 
which are traceable in the languishing condition of the agricultural, 
and the mining, and the manufacturing interests. That cause is 
the fact that under the existing land system the owners of the soil 
are able to obtain, and to exact, so large a proportion of the pro- 
ceeds of the industry of the United Kingdom that the remainder 
is insufficient to secure adequate remuneration tO' the industrial 
classes, either in the shape of wages tO' operatives or reasonable 
profit to the organisers of labour, the employers, or capitalists. 

e) A Land Boom in lozva 

BY ALTERED RUSSE;i, WALIvACE 

I stayed some time in a growing city in Iowa, called Sioux City, 
which has a population of 20,000. They were having what is called 
a land boom — every city tries its best to have one — we should call 
it a land fever; and the consequence was that land which sold at 
$50 an acre three years ago was selling at $750. It was two miles 
from the city and it was sold with the idea that the city would soon 
stretch out, and reach it. In the residential suburbs the price ob- 
tained was $22,000 an acre, and in the centre of the city it was 
$200,000 an acre. In the town of Salina, in Kansas, with a popu- 
lation of only 8,000, land in the suburbs is now selling at $22,000 
an acre, and in the centre of the town at $150,000 an acre. Here 
also they have had a boom, and land has doubled in value in a few 
months. 



PROBLEMS OF TAXATION 723 

f) The Social Importance of Renf^ 

BY ALFRED RUSSEL WALLACE 

Rent is the equalizer of opportunities, the means of giving fair 
play to all cultivators of the soil in the struggle for existence. Farms 
differ greatly in value because of differences in fertility and differ- 
ences in location as regards the market. The owner of a very fer- 
tile farm near the railroad has quite an advantage over one whose 
farm is less fertile and far removed from the main lines of com- 
munication. It is just the same with shops and stores. The busi- 
ness done, other things being equal, will depend upon the location. 
Now prices are fixed by the competition of the whole of the stores 
or farms. Because of the strength of the more favored class, were 
there no rents, the less favored class would be driven out and the 
whole business absorbed by their more fortunate rivals. But if all 
these shops belong to landlords, whether private individuals or 
municipalities, then rents will be so much higher in one case than 
in the other as to equalize the opportunities of both. Both will then 
be able to earn a living for a time, and the ultimate superior success 
of either will be a matter of business capacity. The competition 
between them will be fair and equal. 

The same thing happens with rival manufacturers. Facilities 
for getting raw materials, cheapness of power, enable one to under- 
sell another, and ultimately to drive him out of the market, unless 
the former is subjected tO' an increased rent, to compensate for his 
advantage of position. 

g) The Benefits of Improvement-'^ 

BY ADOLPH WAGNER 

The great expenditure of the State out of the resources of the en- 
tire population, and with the increasing population, for the most part 
out of the resources of those who do not own land, for street san- 
itation, education, etc., has ultimately the tendency to increase the 
height of rent and the value of property in urban lands and build- 
ings, because the increase in the urban population is thereby fav- 
ored. In such cases the uAan landowner profits doubly, and the 
landless population pays in taxes the money for expenditure which 
indirectly leads to a new increase in rents, thus suffering in two 
ways. 

-"Adapted from "The Social Quagmire and the Way out of It," in Studies 
Scientific and Social, II, 404-405 (1900). 

-^Adapted from Grundlegung der politischen Oekonomie, 658-659 (1892). 



724 CURRENT ECONOMIC PROBLEMS 

351. The Social Injustice of Rent^^ 

BY he;nry george; 

The coal and iron fields of Pennsylvania, that today are worth 
enormous sums, were fifty years ag'O' valueless. What is the efficient 
cause of the difference? Simply the difference in population. The 
coal and iron beds of Wyo^ming and Montana, which today are 
valueless, will in fifty years from now be worth millions on mil- 
lions simply because in the meantime population will have greatly 
increased. 

The man who sets out from the Eastern seaboard in search of 
the margin of cultivation, w^here he may obtain land without pay- 
ing rent, must, like the man who swam a river to get a drink, pass 
for long distances through half-tilled farms, and traverse vast areas 
of virgin soil, before he reaches the point where land can be had 
free of rent. He is forced so much further than he otherwise need 
have gone by the speculation which is holding these unused lands 
in expectation oi increased value in the future. 

That land speculation is the cause of industrial depression is 
clearly evident. In each period of industrial activity land values 
have steadily risen, culminating in speculation which carried them 
in great jumps. This has been invariably followed by a partial ces- 
sation of production accompanied by a commercial crash ; and then 
has succeeded a period of comparative stagnation, during- which 
again the equilibrium has been slowly established, and the same 
round has been run again. 

Land can yield no wealth without the application of labor ; labor 
can produce no wealth without land. These are the two equally 
necessary factors of production. Yet to say that they are equally 
necessary is not to say that in the making of contracts as to- distri- 
bution, the possessors of the two meet on equal terms. For the 
nature of the two factors is very different. Land is a natural ele- 
ment; the human being must have his stomach filled every few 
hours. Land can exist without labor ; but labor cannot exist with- 
out land. Land can lie idle for years, and it will eat nothing. But 
the laborer and his family must eat every day. And so in the mak- 
ing O'f terms between them the landlord has an immense advantage. 
And, further than this, as population increases, as the competition 
for the use of land becomes more and more intense, so- are the 
owners of land enabled to get for the use of their land a larger and 
larger part of the wealth which labor exerted upon it produces. 

^^Adapted from Progress and Poverty, Book IV, chaps, ii, Iv, and Book 
V, chap, i (1879), and The Land Question, 62 (1881). 



PROBLEMS OF TAXATION 725 

That is to say the value of land steadily rises. This steady rise 
brings about confident expectations of future rises of value, which 
produces among landowners all the effects of a monopoly to hold 
for higher prices. Thus there is a constant tendency to force mere 
laborers to take less and less or to give more and more of the pro- 
ducts of their work for the opportunity to work. In course of time, 
in any society, some of the people are able to talce and enjoy a sup- 
erabundance of all the fruits of labor without doing any labor at 
all, while others are forced to work the livelong day for a pitiful 
living. 

352. The Theoretical Basis of the Single Tax" 

BY C. B. FlIvIvEBROWN 

The argument in favor of the single tax may be put briefly as 
follows: The three economic legs necessary and sufficient where- 
upon the single tax stool may firmly stand are found in three 
generic peculiarities quite exceptional in their nature, which dis- 
tinguish land from man-made products. The failure to recognize 
this distinction is sufficient to account for the crookedness of the 
present system of taxation. These three attributes, firmly grounded 
in orthodox economics, are as follows : (a) The site value of land 
is a social product, {b) A land tax cannot be shifted, (c) The selling 
value of land is an untaxed value. These three fundamentals are 
worthy of brief separate consideration. 

First in order is that land value is a social product, that it is 
created principally by the community through its activities, indus- 
tries, and expenditures. The value of land is based upon economic 
rent, "what land is worth for use." Strictly speaking this worth 
for use attaches itself not only to the ground but to scores of things 
exterior to it and through it made available for use. In practice 
the term land is erroneously used to include destructible elements 
which require constant replacement ; but these form no part of the 
economic advantage of situation. Ground rent may be said to result 
from at least three distinct causes, all of which are connected with 
aggregated social, as distinct from individual, activity : ( i ) , public 
expenditure; (2), quasi-public expenditure; (3), private expendi- 
ture. Thus their very nature and origin would seem to point to land 
values as peculiarly fitted to bear justly the burden of taxation. 

Second in order is the fundamental fact that a tax upon ground 
rent cannot be shifted upon the tenant in increased rent. Ground 
rent is determined, not by taxation, but by demand. Ground rent 

"Adapted from The A-B-C of Taxation, 155-163. Copyright by the 
author (1909). 



726 CURRENT ECONOMIC PROBLEMS 

is the gross income, a tax is a charge upon this income. A tax may • 
be conceived of as a lien upon land held by the state. It affects the 
relations between owner and state ; it has no bearing' upon the rela- 
tions between owner and tenant. Tax is simply the name of the 
gross ground rent which is talcen by the state in taxation, the other 
part going tO' the owner. The greater the tax the smaller the net 
rent to the owner and vice versa. Ground rent is "all that the traffic 
will bear." The owner gets all he can for the use of his land 
whether the tax be light or heavy. Putting more tax upon land will 
not make it worth more for use. 

Third is the necessary corollary that the selling value of land 
is an untaxed value, a proposition which has not been seriously 
questioned by economists. Every purchaser of a piece of property 
knows without argument that he is governed as to the price he will 
pay, not by the gross income, but by the net income that will remain 
to him after all charges and incumbrances have been discharged. 
Landowners who invest today are entirely exempt from taxation. 
It is in the very nature of things that the burden of a land tax cannot 
be made to survive a change of ownership. 

If it is admittedly wrong that present land values should be un- 
taxed, how can such fiscal wrong best be righted? Begin at once a 
transfer of taxes from improvements to land, so^ gradual that two 
old injustices will cease for every new one that is begun, until this 
untaxed value is made tO' bear at least its proportionate burden at 
the same rate with other things. If economists and taxation ex- 
perts will quit their dead reckoning and steer their craft by the 
single-tax polestar, time and tide will do the rest. 

353. A Criticism of the Single Tax^* 

BY CHARLE;S J. BUIvIvOCK 

In studying Mr. George's plans for land nationalization, the fol- 
lowing considerations are important : 

In one sense of the word, economic rent may be called an un- 
earned income; yet it accrues mainly to people who incur the risks 
of investing in land, and cannot be secured without the exercise 
of foresight. Now, Mr. George assumes that such investors never 
lose, but always gain. This is far from- true. At present, investors 
run the risk of loss when they purchase land and improve it. This 
risk is counterbalanced by the prospect of an increase in economic 
rent. Mr. George would have the state appropriate all such incre- 

'^Adapted from Introduction to the Study of Economics, 454-456. Copy- 
right by Silver, Burdett & Co. (1908). 



PROBLEMS OF TAXATION 727 

ments of econoniic rent, while investors would bear all the losses 
on improvements that should become unprofitable on account of 
changes in the direction O'f the growth of the community. The 
late President Walker said, justly, "Heads I win, tails you lose, is 
not a game at which the state can, in fairness or decency, play a 
part." If the state takes from an investor all increments of rent 
due to social causes, it should guarantee him from losses on capital 
invested in improvements, provided that those losses result from 
social causes over which he has no control. 

As a revenue measure, the single tax would often prove a dis- 
appointment. In England, for instance, the rents of practically all 
agricultural lands have steadily fallen for more than twenty years. 

If the English government had bought out all owners of agricul- 
tural lands at the time when the Land Tenure Reform Association 
proposed such a course, it would have made a decidedly bad invest- 
ment. In many states of our Union the same thing is true of agri- 
cultural rents, while it has occurred repeatedly in cities. 

We must admit that a large unearned increment of ground rents 
is secured by the owners of specially favored lots. No one would 
question the justice of imposing a part of the burden of taxation 
upon such an income ; but we should not forget that there are other 
unearned incomes besides those secured from some pieces of land. 
When a monopo'ly of any sort develops an unusually profitable field 
of investment, part of the monopoly profits are an unearned income, 
and should be taxed also. As a simple matter of fact, all those 
persons who have the good fortune tO' be favorably affected by each 
actual turn of social development are likely to receive unearned in- 
comes. It is just to tax all of these incomes whenever they can 
be reached with certainty ; but to tax them all away is quite a differ- 
ent matter. Finally, in the United States, there are practically no 
restrictions upon the purchase or sale of land. Any unearned in- 
crement is likely to be distributed quite widely, because landowner- 
ship is widely extended. 

Mr. George's plan of confiscating the value of land without com- 
pensating present owners does not appeal to the conscience of the 
average American as just. Society has allowed private landown- 
ership in this country ever since English settlement. The pres- 
ent owners have invested in land in good faith. If it should be 
decided inexpedient to continue our present s^^stem, the burden of 
the change should not be thrown upon the single class of landowners. 



XIV 
COMPREHENSIVE SCHEMES OF SOCIAL REFORM 

"Social unrest" is not an exclusive and prized possession of Modern 
Industrialism. The voice of prophet, of seer, or reformer, has long been 
heard in the land, condemning the prodigal waste of the rich, the unjust 
distribution of "the common store of earthly wealth," the institutions which 
"create and perpetuate artificial class differences," and the "tangled scheme 
of human affairs" which we call life. Peculiar as are the voices condemn- 
ing the society we know, they are like those of other times in demanding 
"a way out." 

_ That all is not good is clearly realized by even the most stalwart of 
individualists. In devious ways they would guide us out of the social 
wilderness. One would leave "natural selection" to "eHminate the unfit," 
to free us from "the spawn of earth," and to make us a happier society 
by making us a better people. Another would substitute a large program, 
and a still larger spirit, of co-operation for "the sordid greed of compe- 
tition" that "makes chaos of economic cosmos." The Utopian dreams of 
co-operation, however, have recently been blighted by a cool analysis which 
shows that its promises are bright but not spectacular. Most prominent 
just now is the program of those wise in the lore of business who promise 
a transformed society through the magic of profit-sharing, "scientific man- 
agement," and "welfare work." Give them control of technique, organ- 
ization, and working conditions, and they will fill the land with plenty, the 
while raising labor to a pinnacle before undreamed of. Through their 
superimposed scheme the unwilling laborer is to be fed, clothed, housed, 
recreated, amused, educated, and introduced into a new paradise. If he 
fails to get what he wants — if industrial democracy fails of realization — 
he will at least get what is good for him. A supreme pre-wisdom will 
supplant his shortsightedness. 

But the non-individualists are even more bent upon a transformation 
of industrial society. One program of reconstruction, a program inherent 
in the activity of a number of groups, rather than consciously formulated, 
is well under way. It is evident in the tendency toward government regu- 
lation — and even ownership — of railroads and capitalistic monopolies ; in 
the proposal to choose our own population by a regulation of births and 
of immigration ; in the attempt through state action to eliminate economic 
insecurity; in the growth of a spirit of group solidarity so apparent in 
unionism; in a formal modification of the "fundamental" institutions of 
society, and informal change through taxation and social convention. The 
extent to which this program will be realized — and whither it is tending 
— only the future can reveal. 

A more drastic program, springing from a similar philosophy, is pre- 
sented in socialism. Its strength lies partly in the "righteous indictment" 
which it can make against the "capitalistic organization of society," and 
partly in the sublime faith which the classes to which it appeals have in 
the efficacy of elaborate social machinery to eliminate social evils. The 
analysis of society made by most of its advocates is immediate, and loses 
sight of several "long-time" considerations, such as control of numbers 
and the accumulation of capital. Socialism, however, is losing its militancy. 
As its numbers increase, it is less and less disposed to "see red." In its 
latest manifestations it has become conventionally "respectable." It is hard 

728 



PROJECTS OF SOCIAL REFORM 729 

to distinguish between the "evolutionary socialist" of today and the out- 
and-out progressive. The radical members are leaving the ranks of social- 
ism to fight for "something worth while" with the syndicalists and the 
"revolutionary unionists." To find the radical spirit of protest we must 
turn to these latter organizations. 

But what of the future of industrial society? What is going to become 
of it? When will it solve its problems? When shall we attain unto peace 
and plenty? Perhaps we can find some consolation in the fact that even the 
wisest of men have constantly despaired of the future of society. Perhaps 
we can solace ourselves with hope, which is ours eternally. From the 
biblical dream of the "New Jerusalem" to Wells's vision of "A Modern 
Utopia," we have had pictures a-plenty of the perfect state which "some 
day" will be realized. We have always had, and still have, wise men who 
furnish us with magical formulae for finding "the way out." While most 
of these are so simple as to tax our credulity, few of them fail to contain 
some germ of social wisdom. 

But, in anticipating the future, we must not forget that our social 
resources are — and ever must be — limited. We must not overlook the fact 
that the interests of all are not identical. There will ever be the necessity 
for a struggle with finite resources, and consequent economy. There will 
ever be competition for the larger shares of social income. If we intelli- 
gently attempt to direct the course of our development, if we try honestly 
to make the best possible contribution to the solution of the world-old 
enigmas of society, if we do our best to rid the immediate situation of 
its grosser incompatibilities, there is reason for thinking that development 
will more closely accord with that which we call "progress," that the newer 
social world will be somewhat more to the liking of the people who have 
to put up with it than the old. We shall not have freed future generations 
from having to "solve problems," but perhaps we shall have given them 
new problems somewhat further removed from "the margin of life." And 
thus we come to the end — and to the beginning — of our study. 



A. THE VOICE OF SOCIAL PROTEST 

354. Privilege and Power 

a) Woe to the Idle Rich^ 

Woe to them that are at ease in Zion, and to them that are secure 
in the mountain of Samaria, the notable men of the chief of the 
nations, to whom the house of Israel come ! Pass ye into Calneh, 
and see ; and from thence go ye to Hamath the great ; then go down 
to Gath of the Philistines : are they better than these kingdoms ? 
or is their border greater than your border?— ye that put far away 
the evil day, and cause the seat of violence to come near; that lie 
upon beds of ivory, and stretch themselves upon their couches, and 
eat the lambs out of the flock, and the calves out of the midst of the 
stall ; that sing idle songs to the sound of the viol ; that invent for 
themselves instruments of music, like David ; that drink wine in 
bowls, and anoint themselves with the chief oils ; but they are not 

^Amos, 6:1-7 (750 B. C.) 



730 CURRENT ECONOMIC PROBLEMS 

grieved for the affliction of Joseph. Therefore shall they now go 
captive with the first that go captive; and the revelry of them that 
Stretched themselves shall pass away. 

h) The Daughters of Zion^ 

Moreover Jehovah said, Because the daughters of Zion are 
haughty, and walk with outstreched necks and wanton eyes, walking 
and mincing as they go, and making a tinkling with their feet ; there- 
fore the Lord will smite with a scab the crown of the head of the 
daughters of Zion, and Jehovah will lare bare their secret parts. In 
that day the Lord will take away the beauty of their anklets, and 
the cauls, and the crescents ; the pendants, and the bracelets, and the 
mufflers ; the headtires, and the ankle chains, and the sashes, and 
the perfume boxes, and the amulets; the rings, and the nose jewels; 
the festival robes, and the mantles, and the shawls, and the satchels ; 
the hand-mirrors, and the fine linen, and the turbans, and the veils. 
And it shall come to pass, that instead of sweet spices there shall 
be rottenness ; and instead of a girdle a rope ; and instead of well 
set hair, baldness; and instead of a robe, a girdling of sackcloth; 
branding instead of beauty. 

c) Why the LordsP 

BY JOHN BALIv 

By what right are they whom we call lords greater folk than 
we? Why do they hold us in serfage? They are clothed in velvet, 
while we are covered with rags. They have wine and spices and 
fair bread ; and we oat-cake and straw, and water to drink. They 
have leisure and fine houses ; we have pain and labor, the rain and 
the wind in the fields. And yet it is of us and our toil that these 
men hold their state. 

d) Government and Inequality^ 

BY SIR THOMAS MORE; 

Is not that government both unjust and ungrateful that is so 
prodigal of its favors to those that are called gentlemen, or such 
others who are idle, or live either by flattery or by contriving the 
arts of vain pleasure, and, on the other hand, take no care of those 
of a meaner sort, such as ploughmen, colliers, and smiths, without 

^Isa., 3:16-24 (750 B. C.) 

'Quoted in Wallace, Studies Scientific and Social, II, 432 (1366?). 

^Adapted from Utopia, Cassell's National Library edition, 17 (1516). 



PROJECTS OF SOCIAL REFORM 731 

whom we could not subsist? But after the pubHc has reaped all 
the advantage of their service, and they come tO' be oppressed with 
age, sickness, and want, all their labors and the good they have done 
is forgotten, and all the recompense given them is that they are 
left to die in great misery. The richer sort are often endeavoring 
to bring the hire of laborers lower — not only by their fraudulent 
practices, but by the laws which they procure to be made to that 
effect; so that though it is a thing most unjust in itself to give such 
small rewards to those who deserve sO' well of the public, yet they 
have given those hardships the name and color of justice, by pro- 
curing laws to be made for regulating them. 

Therefore, I must say that, as I hope for mercy, I can have no 
other notion of all the governments that I see and know than that 
they are a conspiracy of the rich, who, on pretense of managing the 
public, only pursue their private ends, and devise all the ways and 
arts they can find out ; first, that they may, without danger, preserve 
all that they have so ill acquired, and then that they may engage the 
poor to toil and labor for them at as low rates as possible, and op- 
press them as much as they please. 

e) The Possibilities of Production^ 

BY RICHARD jEf'P'REY 

I verily believe that the earth in one year can produce enough 
food to last for thirty. Why then have we not enough? Why do 
people die of starvation, or lead a miserable existence on the verge 
of it? We have millions upon millions tO' toil from morning till 
evening just to gain a mere crust of bread? Because of the absolute 
lack of organization by which such labor should produce its effects, 
the absolute lack of distribution, the absolute lack of even the very 
idea that such things are possible. Nay, even to mention such 
things, to say that they are possible is criminal with many. Mad- 
ness could hardly go further. 

f) The Beginning of It All^ 

BY J. J. rousse;au 

The first man, who having enclosed a piece of ground, took 
thought to declare, "This is mine," and found people simple enough 
to believe him, was the real founder of civil society. How many 
crimes, wars, and murders, how much misery and horror would have 

^Quoted in Wallace, Studies Scientific and Social, II, 490-491. 
*Discours sur I'inegalite, CEuvres, I, 551 (1754). 



732 CURRENT ECONOMIC PROBLEMS 

been spared the human race if some one, tearing down the pickets 
and filling up the ditch, had cried to his fellows, "Beware of listen- 
ing to that imposter; you are lost if yon forget that the land be- 
longs to none and its fruits to all." 



355- "Progress and Poverty" 

a) In the Wake of Trade'' 

BY OLIVER GOLDSMITH 

Ye friends to truth, ye statesmen who survey 
The rich man's joys increase, the poor's decay, 
'Tis yours to judge how wide the limits stand 
Between a splendid and a happy land. 
Proud swells the tide with loads of freighted ore. 
And shouting folly hails them from her shore; 
Hoards even beyond the miser's wish abound. 
And rich men flock from all the world around. 
Yet count our gains ; this wealth is but a name 
That leaves our useful products still the same. 
Not so the loss. The man of wealth and pride 
Takes up a space that many poor supplied ; 
Space for his lake, his park's extended bounds. 
Space for his horses, equipage, and hounds : 
The robe that wraps his limbs in silken sloth 
Hath robbed the neighboring fields of half their growth ; 
His seat, where solitary sports are seen. 
Indignant spurns the cottage from the green : 
Around the world each needful product flies. 
For all the luxuries the world supplies ; 
While thus the land, adorn'd for pleasure, all 
In barren splendour feebly waits the fall. 

b) When There Was a Frontier^ 

BY J. B. MC MASTER 

The year 1786 in all the states was one of unusual distress. The 
crops had indeed been good. In many places the yield had been 
great. Yet the farmers murmured, and not without cause, that 
their wheat and their corn were of no more use tO' them than so 
many bushels of stones ; that produce rotted on their hands. That 

''The Deserted Village, lines 265-286 (1770). 

^Adapted from The History of the People of the United States, II, 180. 
Copyright by D. Appleton & Co. (1885). 



PROJECTS OF SOCIAL REFORM 733 

while their barns were overflowing', their pockets were empty. That 
when they wanted clothes for their families, they were compelled 
to run from village to village to find a cobbler who would take 
wheat for shoes, and a trader who would give everlasting in ex- 
change for pumpkins. Money became scarcer and scarcer every 
week. In the great towns the lack of it was severely felt. But in 
the country places it was with difficulty that a few pistareens and 
coppers could be scraped together toward paying the state's quota 
of the interest on the national debt. 

A few summed up their troubles in a general way, and declared 
the times were hard. Others protested that the times were well 
enough, but the people were grown extravagant and luxurious. For 
this, it was said, the merchants were to blame. There were too 
many merchants. There were too many attorneys. Money was 
scarce. Money was plenty. Trade was languishing. Agriculture 
was fallen into decay. Manufactures should be encouraged. Paper 
should be put out. 

One shrewd observer complained that his countrymen had fallen 
away sadly from those simple tastes which were the life-blood of 
republics. It was distressing to see a thrifty farmer shaking his 
head and muttering that taxes were ruining him at the very moment 
his three daughters, who would have been much better employed 
at the spinning-wheel, were being taught to caper by a French dan- 
cing master. It was pitiable to see a great lazy, lounging, lubberly 
fellow sitting days and nights in a tippling house, working perhaps 
two days in a week, receiving double the wages he really earned, 
spending the rest of his time in riot and debauch, and, when the 
tax-collector came round, complaining of the hardness of the times 
and the want of a circulating medium. Go into any cofifee-house of 
an evening, and you were sure to overhear some fellow exclaiming, 
"Such times! no money to be had! taxes high! no business doing! 
we shall all be broken men," 

c) Labor and Value^ 

Wages should form the price of goods ; 

Yes, wages should be all ; 
Then we who work to make the goods, 

Should justly have them all ; 
But, if their price be made of rent, 

Tithes, taxes, profits all, 
Then we who work to make the goods 

Shall have just none at all. 

"Quoted in the article on "Chartism," in The Dictionary of Political 
Economy, from The Poorman's Guardian (1831). 



734 CURRENT ECONOMIC PROBLEMS 

d) The Poor in Manchester^^ 

BY fri;di;rick i;ngels 

The manner in which the great multitude of the poor is treated 
by society to-day is revolting. They are drawn into the large 
cities where they breathe a poorer atmosphere than in the country ; 
they are relegated to districts which, by reason of the method of 
construction, are worse ventilated than any others ; they are de- 
prived of all means of cleanliness, of water itself, since pipes are 
laid only when paid for, and the rivers so polluted "that they are 
useless for such purposes ; they are obliged to throw all offal and 
garbage, all dirty water, often all disgusting offal and excrement 
into the streets, being without other means of disposing of them. 
As though the vitiated atmosphere of the streets were not enough, 
they are penned in dozens into single rooms, they are given damp 
dwellings, cellar dens that are not waterproof from below, or gar- 
rets that leak from above. Their houses are so built that the clam- 
my air cannot escape. The view from the bridge is characteristic 
of the whole district. At the bottom flows, or rather stagnates, 
the Irk, a narrow, coal-black, foul-smelling stream, full of debris 
and refuse, which it deposits on the shallower right bank. Every- 
where heaps O'f debris, refuse and offal ; standing pools for gutters, 
and a stench which alone would make it impossible for a human 
being in any degree civilized to live in such a district. The whole 
side of the Irk is built in this way, a planless, knotted chaos of 
houses, more or less on the verge of uninhabitableness, whose un- 
clean interiors fully correspond with their filthy external surround- 
ings. In truth it cannot be charged to the account of these helots 
O'f modern society if their dwellings are not more cleanly than the 
pigsties which are here and there to- be seen among them. My de- 
scription is far from black enough to convey a true impression of 
the filth, ruin, and uninhabitableness, the defiance of all considera- 
tions of cleanliness, ventilation, and health which characterize this 
district. 

e) Packingtown as a Residential Section^^ 

BY A. M. SIMONS 

From the general air of hoggishness that pervades everything 
from the general manager's offices down to the pens beneath the 
buildings and up to the smoke that hangs over it all, the whole 

^"Adapted from The Condition of the Working Class in England in 1844, 
49-53 (1848). 

"Adapted from Packingtown, 2-19. Published by Charles H. Kerr & Co. 



PROJECTS OF SOCIAL REFORM 735 

thing is purely capitalistic. One's nostrils are assailed at every 
point by the horribly penetrating stench that pervades everything. 
Great volumes oi smoke roll from the forest of chimneys at all 
hours of the day, and drift down over the helpless neighborhood like 
a deep black curtain that fain would hide the suffering and misery 
it aggravates. The foul packing-house sewage, too horribly offens- 
ive in its putrid rottenness for further exploitation even by monop- 
olistic greed, is spewed forth in a multitude of arteries of filth into 
a branch of the Chicago River at one corner of the Yards, where 
it rises to the top and spreads out in a nameless indescribable cake 
of festering foulness and disease-breeding stench. On the banks 
of this sluiceway of nastiness are several acres of bristles scraped 
from the backs of innumerable hogs and spread out to allow the 
still clinging animal matter to rot away before they are made up 
into brushes. Tom Carey, now alderman of this ward, owns long 
rows of some of the most unhealthy houses in this deadly neighbor- 
hood. These houses have no connection with the sewers, and un- 
der some of them the accumulation of years of filth has gathered 
in a semi-liquid mass from two to three feet deep. Shabbily built 
in the first place and then subjected to years of neglect, they are 
veritable death-traps. A cast-iron pull with the Health Depart- 
ment renders him safe from any prosecution. 

f) Hallelujah on the Burn^^ 

"O, why don't you work "O, I like my boss — 

Like other men do?" He's a good friend of mine; 

"How in hell can I work That's why I am starving 

When there's no work to do ? Out in the bread-line. 

Chorus: 

"Hallelujah, Fm a bum, "I can't buy a job 

Hallelujah, bum again, For I ain't got the dough, 

Hallelujah, give us a handout — So I ride in a box-car, 

To revive us again." For I'm a hobo. 

"O, why don't you save "Whenever I get 

All the money you earn ?" All the money I earn, 

"If I did not eat The boss will be broke, 

I'd have money to burn. And to work he must turn." 

^^Songs of the Workers, 34. Published by the Industrial Worker. The 
tune is "Revive Us Again." 



736 CURRENT ECONOMIC PROBLEMS 

356. Expanding Wants and Social Unrest^^ 

BY A cape; cod i''ishe;rman 

Yes, that's the trouble. My father wanted fifteen things. He 
didn't get 'em all. He got about ten, and worried considerable be- 
cause he didn't get the other five. Now, I want forty things, and 
I get thirty, but I worry more about the ten I can't get than the 
old man used to about the five he couldn't get. 

B. INDIVIDUALISTIC SCHEMES OF REFORM 
357. Scrub-Humanity^* 

BY SOIvON IvAUER 

I confess that I have never experienced this "love of mankind" 
which lies, or is said to lie, at the root of so much benevolence. 
Most men do not please me. Masses of them stink, and offend me. 
I am not called to minister unto such as these. Your mongrel stock, 
your blotched and scrub-eared curs, your flea-bitten sots, your 
drenched smokers and chewers and swearers, your loafers, your 
sensualists, with bleary eyes and blotched faces — away with them! 
Do not ask me to love them. I cannot bear them. I have no dollars 
to nourish their vices. I have no old clothes for the like of them. 
I will not contribute to your free lodgings for swine. Let them 
find some wallow where they may roll in their favorite mud ! Love 
them? I would sweep them into the public sewers, with the other 
refuse of the city, but that I know Nature hath another use for them. 
She, who converts carrion into banks of violets, will in her own 
good way convert these swine into something other and higher; 
but She has not asked me to help her in this work ! If she needs 
your aid, good philanthropist, give it; but come not to me. / per- 
ceive that no man can save another wherein he most needs saving. 

This "humanity," which the tender philanthropist loves (at a 
distance) and seeks to save, with his often misplaced benefactions, 
is to me no airy Phantom, no mere abstract Apparition. I have 
lived with it, worked with it, eaten and drunken with it, lodged with 
it ; and I know it for the most part to be a most undesirable fellow 
for comradeship. Its breath is foul ; its clothing is redolent of vari- 
ous odors ; its speech is coarse and vulgar ; its thoughts are not 
high ; — the perfume of an unfolding brain-flower, — but are for the 
most part mere cerebrations, mere vaporings of passion, mere ebuUi- 

^^Quoted in Brooks's Social Unrest, 96-97 (1903). 

^*From Social Laws, 112-113. Published by the Nike Publishing Co. 
(1901). 



PROJECTS OF SOCIAL REFORM 737 

tions of brute instincts. It is poor because it is low, and no riches 
could ever elevate it above its chosen state. Give it dollars, it will 
spend them upon its vices chiefly. It will not seek virtue first, as 
the chief est wealth of the soul, but wants dollars, dollars, which 
represent to it more beer, more tobacco, more sensuality, more time 
to loaf on the street. 

Is my picture unwelcome? It is no fancy picture, but painted 
from life. My art cannot convert loafers into typical saints. If 
your philanthropy can do so, I shall not object to it. 



358. The Promise of Co-operation^^ 

BY FRANCIS G. PEABODY 

Industrial co-operation is regarded just now by many people as 
an antiquated and abandoned scheme. Its advantages are moderate 
in their dimensions and slow in their arrival. It calls for much 
patience and economy. It takes the world as it is and makes the 
best of it, instead of condemning it as incapable of good. For all 
these reasons co-operation is unattractive to those who expect a 
wholesale and immediate transformation of the industrial order. To 
such minds revolution looks more promising than evolution ; patience 
seems more like a vice than a virtue ; and economy seems to tempt 
the worker to submission rather than to inflame him with discon- 
tent. "Beware of thrift," a revolutionist has said, "it is the work- 
ingman's enemy; let him spend what he gets and demand more." 

The world of industry, as it might be organized under co-oper- 
ation, would in its outward form seem not unlike the Co-operative 
Commonwealth proposed by socialists. Capitalism would be sup- 
planted by common ownership ; and the profits of production would 
accrue to the wage-earners themselves. 

Yet in their spirit the two movements have hitherto had little 
in common. They have stood, back to back, looking out on different 
worlds. One has welcomed a practical movement toward industrial 
justice, even though it might not reaHze all its dreams ; the other 
has found such partial measures obstructive of the comprehensive 
plan of revolution and tempting working people to an ignoble peace. 

It must be admitted that the history of co-operation in the 
United States goes far to justify either skepticism or hostility. With 
few exceptions it has been a history of failure. Yet the student 
finds his attention arrested by the fact that in all the progressive 

"Adapted from the Introduction to Ford's Co-operation in New England, 
v-xiii. Copyright by the Russell Sage Foundation (1913), 



738 CURRENT ECONOMIC PROBLEMS 

countries of Europe the co-operative system has played a notable 
part both in advancing the welfare and in consolidating the organi- 
zation of wage-earners. In England, Ireland, Belgium, France, 
Italy, and Denmark, distributive stores, agricultural production, 
banking, farming, building — all these types of co-operative industry 
present examples of mutual advantage, popular education, and social 
hope. The single instance of the British organization with its mem- 
bership, in 191 1, of 2,640,091, in 1,407 distributive societies, and its 
wholesale business of £35,744,069 of sales, and £1,000,518 of profits 
is enough to demonstrate the capacity of plain people to conduct 
great business affairs. 

In the presence of such facts it is impossible to dismiss co- 
operation as unimportant or ineffective. The history of abortive 
undertakings in the United States seems to point to unpropitious 
circumstances or unfaithful administration rather than to inherent 
defects in the plan; and the student of industrial conditions seems 
called to inquire, not whether co-operation can succeed, but what 
the special causes in the United States are which have made it so 
often fail. 

What, then, are the most elemental conditions in industrial 
co-operation? The first condition is that of independence. The 
co-operative plan must not be tied up with other and more dubious 
undertakings, whose failure may involve the wreck of co-operation. 
In America communism, vegetarianism, pietism, feminism, have all 
annexed co-operation to their programs, and their abortive colonies 
have involved in their fall much disrepute for co-operative indus- 
try. Co-operation is too admirable a scheme to be made a bait for 
converts to Utopia. 

The second condition is a considerable degree of fixity in resi- 
dence. One joins a co-operative society, paying an entrance fee in 
the expectation of later profits. He has to wait for his dividend. 
The habit of buying at the co-operative store becomes gradually 
fixed in his family, and devotion to the cause is gradually strength- 
ened by an increasing appreciation of advantage. All this gather- 
ing tradition of loyalty is hard to develop among the ordinary 
conditions of American life. We are for the present a nation of 
nomads. This fluidity in population, however, is not likely to last. 
Whenever, therefore, a reasonable fixity of residence has been 
reached, an opportunity of free organization for mutual help will 
have arrived. 

A third condition to success is desire to save. The plan pro- 
poses a bonus on thrift. Distributive stores under co-operation, 
instead of underselling other traders, often accept market rates and 



PROJECTS OF SOCIAL REFORM 739 

reserve the earnings for distribution to purchasers. The wholesale 
societies are themselves the property of the distributive stores, so 
that the profits filter down through the stores to the individual 
members. Thus the expectation of dividend becomes the economic 
basis of loyalty. The co-operator cherishes the faith that a penny 
saved is a penny earned. The American people are beyond all 
comparison, and from richest to humblest, the most unthrifty and 
extravagant in the world. Sooner or later, however, even so light- 
hearted and unprecedentedly prosperous a people as we will have 
to learn the ancient lesson of economy. Thrift will eventually turn 
out to be more lucrative than luck. The chances of gain will dimin- 
ish, and the rewards of saving will increase. Whenever that time 
arrives the co-operative scheme will attract fresh attention. 

A final condition of success is a supply of what the advocates of 
the movement call "co-operative men." The scheme depends on 
fidelity, integrity, and disinterestedness. A completely self-seeking 
man cannot be a good co-operator. Co-operation presupposes com- 
mon sense, forbearance, and co-operative spirit, and can be success- 
ful only where such qualities exist. Co-operation is, in fact, a form 
of moral education, an expression of social ethics, a way of trade 
that might write over its stores : "Bear ye one another's burdens" ; 
"Ye are members one of another." 

This condition of co-operation prescribes its own limitations. 
It is applicable only to the more thoughtful and intelligent of wage- 
earners. The ignorant, the thriftless, and the short-sighted it ex- 
cludes. Moral responsibility, a sense of loyalty, a willingness to 
sacrifice for the cause, are essential to business success. Yet this 
moral demand is precisely what gives to co-operation its peculiar 
place in the industrial world. 

359. "U. S. Steel" and Labor^^ 

BY RAYNAIv C. BOIvIvING 

The officers of the United States Steel Corporation and its sub- 
sidiary companies are not indifferent or self-satisfied as to con- 
ditions among their workmen. They are trying tO' improve those 
conditions as fast as it is practicable to do so. They do not main- 
tain that the lot of the steel-worker is easy or ideal ; but they do 
maintain that their workmen are treated as well on the whole as 
the workmen in any other industry and treated far better than ever 
before in the steel industry. 

"Adapted from an article in the Annals of the American Academy of 
Political and Social Science, 'K'LII, 38-46. Copyright (1912). 



740 CURRENT ECONOMIC PROBLEMS 

The United States Steel Corporation has made it possible for 
every employee, even down to the ordinary laborer, to become an 
owner of its stock. In its iron mines, a thousand feet underground, 
I have seen men working with pick and shovel who proved, when 
questioned, to be stockholders in the company. Over 30,000 of the 
workmen are thus interested in the business. These employee stock- 
holders derive the following special benefits from the plant : ( i ) 
They are induced to save money, often for the first time in their 
lives. (2) For five years they receive a very high return upon 
their investments, and thereafter a large return for such small in- 
vestments. (3) They are induced to feel a direct interest in the 
business and to remember that their own interests are tied up 
with those of the company. (4) They are encouraged to remain 
with the company and to profit by permanent employment. 

Before there was any law in this country which required any- 
thing of the kind, the United States Steel Corporation established a 
system of voluntary accident relief absolutely regardless of legal 
liability. Every man injured and the family of every man killed 
is taken care of without need of lawsuits or even of any claims 
against the companies. Last year we were sued in only two-tenths 
of one per cent of the cases — showing how satisfactory this plan 
has proved to our workmen. 

The United States Steel Corporation has spent six years in the 
development of a system of preventing accidents, which I confi- 
dently believe is not surpassed anywhere in the United States or 
abroad. The system which has been worked out comprehends all 
manner of safety devices and other material safeguards, but, above 
all, it is based upon the development of an earnest, constant and 
determined effort tO' prevent work accidents — all the way from the 
president down to- the lowest workman. 

In six years the number of serious and fatal accidents among 
workmen of the United States Steel Corporation has been reduced 
forty-three per cent, and more than 2,000 men each year are saved 
from injury or death in work accidents which would have hap- 
pened to them under old conditions. 

At all our mills, mines and plants provision is made for the best 
surgical and hospital treatment obtainable for employees injured 
in our work. In the mining regions the arrangements include med- 
ical attention for the men and for their families. 

By an arrangement under which $8,000,000 is being added to 
the $4,000,000 originally given by Mr. Andrew Carnegie, there has 
been provided a permanent fund of $12,000,000, fromi the income 
of which all superannuated employees of the United States Steel 



PROJECTS OF SOCIAL REFORM 741 

Corporation who have remained twenty years in its service are 
assured support for the rest of their Hves. The smallest pension 
given is $12 a month and the largest $100^ — thus the lowest paid 
workman will receive enough tO' provide for his necessities and the 
high-salaried employees do not become a drain on the fund. 

The most recently organized work for improving conditions 
among employees of the Steel Corporation is in sanitation and wel- 
fare. This work is being organized in the samiC manner in which 
the system of accident prevention has been worked out and with 
the same theory of bringing these matters homx to the heads of 
departments, superintendents and foremen, and above all, to the 
men themselves. 

This work includes sanitary disposal of sewage and fecal matter, 
provision for pure water in all plants and houses, the protection of 
food supplies, especially milk and meat, and the installation of 
wash-rooms, shower-baths and lockers for a change of clothing. 

All our companies are donors to hospitals, churches, clubs, li- 
braries and other organizations established by the communities and 
the workmen. It is the aim of our managers to make their plants 
a benefit to the communities in many ways additional to the wages 
paid the workmen. 

Few people know how much our plant managers spend in car- 
rying employees through hard times when there is not work enough, 
in furnishing groceries and coal, in paying rent and insurance to 
assist sick employees, in giving a little Christmas cheer to those 
who are in misfortune. 

Please do not understand me to say that all of these things aje 
done in all the subsidiary companies or in any of them. Many of 
these things are done in all of the companies, and all these and 
other means of making better the conditions of its workmen are on 
trial and under consideration somewhere in the Steel Corporation, 
with the hope and the purpose of eventually bringing all the com- 
panies and all the plants to the best standards. 

The hours of labor in the steel mills of this country grew up 
with the industry. They were not established by the United States 
Steel Corporation, and they can only be changed slowly where 
changes are shown to be practicable and desirable. 

The twelve-hour day exists among only twenty-five per cent of 
the workmen employed by the United States Steel Corporation, al- 
though in the blast furnaces and rolling m.ills, to which the twelve- 
hour day is largely confined, probably half the workmien have a 
tv/elve-hour day, more or less modified by periods of rest. The 
steel industry adopted the two-turn svstem long before the United 



742 CURRENT ECONOMIC PROBLEMS 

States Steel Corporation was organized. The same system pre- 
vails in Germany, where labor conditions have probably been made 
the subject of more state supervision than anywhere else in the 
world. Personally, I am satisfied that the lightening of labor by 
machinery and the rest periods prevent the twelve-hour day from 
doing any physical injury tO' the workmen. Since the Steel Corpor- 
ation was organized the price of its products has been reduced on 
the average about ten dollars a ton. Meanwhile, wages have been 
increased twenty-five per cent. Yet the eflSciency of labor has not 
increased. It would be easy to substitute an eight-hour day for 
twelve hours if the workman could accept two-thirds his present 
wages, but the workman, like everyone else, prefers longer hours 
to lower wages ; and there are more applicants for twelve-hour 
positions than for those where the work is only ten hours, because 
the former pay better. This is an economic problem which con- 
fronts the industry and time is required for its solution. 

The question of organization among the workmen in the steel 
industry is too large, too serious and too- difficult a subject to dis- 
cuss in a small portion of a short address. It is a subject where 
discussion too O'ften engenders ill feeling and most unfortunate 
bitterness, where differences of opinion are seldom accepted with 
patience or tolerance on either side. For myself, I believe we must 
get rid of lawlessness and of violence and oppression on. both sides 
and wherever they appear. I believe no agreement can be reached 
until the two parties are both prepared to seek an agreement on 
the basis of mutual advantages offered and of equal responsibilities 
assumed. 

360. Labor and "U. S. Steel"" 

BY JOHN A. FiTCH 

A discussion of the subject "Industrial Combinations and the 
Wage Earner" with reference to the Steel industry, may well take 
the form of an answer to the inquiry, "Has the formation of the 
United States Steel Corporation proven a good thing for labor or 
the reverse?" 

The reasons for choosing the United States Steel Corporation 
are both logical and obvious, I believe. It is the greatest combina- 
tion in the industr}^ ; it has more money to spend on improvements 
than any other, and so furnishes the most favorable basis for judg- 

'■'' Adapted from an article in the Annals of the American Academy of 
Political and Social Science, XLII, 10-19. Copyright (1912). 



PROJECTS OF SOCIAL REFORM 743 

ment as to the effect of such combinations ; and it employs over 
200,000 workmen, while its largest competitor employs less than 
20,000. 

It may be well first to consider briefly who the steel workers are. 
Not over twenty per cent of the employees in blast furnaces and 
rolling mills can be regarded as highly skilled. Twenty to twenty- 
five per cent more may be termed semi-skilled, and the remaining 
fifty-five to sixty per cent are unskilled laborers. Roughly, the 
gradations in skill correspond to gradations in nationality. You will 
not find an Anglo-Saxon among the unskilled ; you will hardly find 
one in ten who is American born. Sixty per cent of them are un- 
naturalized and a third are unable to speak the English language. 

The steel industry has had an increasing demand for the raw 
South-European immigrants, and there is reason to believe that the 
demand will be larger as time goes on. 

Let us turn next to labor conditions. Employees in sheet and tin 
mills work in three shifts of eight hours each. Yard laborers, shop 
men, and tube-mill workers have a ten-hour day. In the actual 
manufacturing processes, however, and in the rolling of rails, beams, 
and plates, the regular working day is twelve hours. Fully fifty per 
cent of the men in the industry have a twelve-hour day. The em- 
ployees in several departments work seven days a week. The situa- 
tion is aggravated by the night crew of one week becoming the day 
crew during the next week. The change in shifts forces a crew to 
remain on duty 24 hours once in two weeks. 

It is difficult to make a statement regarding wages, because the 
wage schedule of a steel mill is a very complex affair. In 1907 I 
was given wage figures from the pay roll of a Steel Corporation 
mill in the Pittsburgh district. The figures included all of the men 
in five departments of a steel mill, including every necessary step 
in the process of turning pig iron into a finished steel product. 
There were 2,304 men included, and they were grouped according 
to earnings as follows : 125, or approximately five per cent, re- 
ceived over $5 a day ; 524, or twenty-three per cent, received be- 
tween $2.50 and $5.00, and 1,655, 01* seventy-two per cent, re- 
ceived $2.50 a day or less. 

In May, 1910, a general wage increase was announced by the 
Steel Corporation, which was described as averaging six per cent. 
This increase, so far as common labor is concerned, amounted to 
one cent an hour. The rate in 1908 was 16 1-2 cents an hour in 
the Pittsburgh district, and it is now 17 1-2 cents. This is the high- 
est rate paid by the Steel Corporation. In its Chicago^ mills the 
rate is 17 cents, and in its Birminghami, Alabama, mills it is 13 to 
14 cents. 



744 CURRENT ECONOMIC PROBLEMS 

Professor Chapin, in his study made for the Russell Sage Foun- 
dation, decided that a decent standard of living could not be main- 
tained in New York City by a family of five persons on an annual 
income of less than $800, and that there is no assurance that it can 
be maintained on an income below $900. No unskilled steel worker 
in America can earn even $800 a year on the rate that is being paid 
today. 

I now come to what I shall call the ameliorative efforts of the 
Steel Corporation — the things regarded by the Corporation as done 
on the credit side of the account. 

First in this list I shall place the campaign for safety. In the 
past the steel industry has had an unenviable record of accidents 
to workmen. However, much has been done in the installation of 
safety devices and the inculcation of habits of caution. The hos- 
pital service is generally good. The pension fund of $4,000,000 
left by Andrew Carnegie and a fund of the American Steel and Wire 
Company, one of the constituents of the corporation, have been 
consolidated and the capital increased to $12,000,000, the income to 
be used to pension superannuated or disabled employees of the cor- 
poration. 

The steel industry was never thoroughly unionized, although 
prior to the formation of the Steel Corporation there was a consid- 
erable amount of unionism in the Pittsburgh district. The Carnegie 
Company had eliminated unionism from its plants in 1892, and of 
the large plants rolling rails and structural material, the IlHnois 
Steel Company was the only one entering the corporation with union 
labor. Soon afterward, however, in 1901, the plants of this com- 
pany were freed from unionism through a strike. During this strike 
the executive committee of the corporation adopted a resolution in 
opposition to organized labor and declared that it would not permit 
its extension. After this it apparently adopted a policy looking to 
the extermination of organized labor. As a result union labor has 
now been eliminated from all its properties, with the possible excep- 
tion of its railroads. The corporation is absolutely opposed to collec- 
tive bargaining and has adopted a number of plans calculated to 
prevent an outbreak of organization on the part of its employees. 

The pension plan, although a desirable thing in itself, has the 
effect of keeping m^en silent who might wish to protest against ex- 
isting conditions. In order to enjoy its benefits, the men must have 
served twenty years continuously in the employ of the corporation 
or of one of its subsidiaries. This effectively prevents any stoppage 
of work as a protest against anything considered unjust by the 
workmen, if they would keep their record such as to enable them 



PROJECTS OF SOCIAL REFORM 745 

to draw the pension in old age. The pension rules also specifically 
set forth the obvious truth that the Corporation does not give up 
its right to discharge its employees. There is nothing in it to pre- 
tect a 'man excepting his subservience to- his superior officers, and 
the nearer he approaches toward twenty years of continuous ser- 
vice, the greater his subservience may conceivably be — for he might 
be discharged at the end of nineteen years and eleven months and 
his right to the pension would be forfeited. 

The so-called profit-sharing plan also has features designed to 
keep the employee from standing out vigorously in defense of what 
he may consider his rights. The rules plainly state that the yearly 
$5 bonus for each share of stock, and the additional bonus at the 
end of each five-year period, are to go, not as a matter. of right to 
each employee who holds stock, but only to those whom the ex- 
ecutive officials may consider loyal. 

Under these two systems, then, a man will utterly fail of secur- 
ing the benefits offered if he is offensive to the administrative of- 
ficials. He may take his choice between exercising his right to 
register his objections tO' working conditions or to the labor con- 
tract and run the risk oi losing his right to the benefits offered, 
or he may withhold his protests, if he has any, and establish his 
reputation for loyalty by keeping silent. The effect of this attitude 
of the Corporation tends, in a great many instances, to outweigh 
anything that it may dO' in the direction of providing better labor 
conditions. 

Unionism is a very faulty and often a dangerous form of or- 
ganization. But we have so^ far worked out no better method of 
establishing justice in industrial matters than leaving it to the 
bargaining strength of the two parties to the contract. 

C. THE SOCIALIST'S INDICTMENT OF CAPITALISM 
361. Marx's Theory of the t)evelopment of Capitalism^® 

BY WERNE;r SOMBART 

Marx held a particular view concerning the period of history in 
which we are now living, that is to say, concerning the age oi Cap- 
italism, and this view tried to show the justification for the socialist 
movement. He showed it in two ways. In the first place, he at- 
tempted to prove that the present capitalist system, by virtue of its 

^^Adapted from Socialism and the Social Movement, 6th ed., 71-86. Pub- 
lished by E. P. Dutton & Co. (1908). 



746 CURRENT ECONOMIC PROBLEMS 

inherent qualities, contained within itself the g'erms of its own de- 
cay ; and, in the second place, that as the capitalist system decays it 
creates the necessary conditions for the birth of socialist society. 
These ideas may be thus expressed. The capitalist system, in its 
onward flow, develops phenomena which prevent the smooth work- 
ing of the great producing machine. On the one hand we have in- 
creasing socialization of production — the tendency for production 
to be more and more on a large scale ; for big businesses to swallow 
up smaller ones — and the increasing intensity in production. On 
the other hand, the direction of production and its distribution are 
still in private hands — in those of the capitalist undertaker. 

These tendencies come into more serious opposition as time goes 
on, and the result is that commercial crises, that disease to which 
capitalist organization of industr\^ is so liable, appear periodically, 
and with more and more disastrous results. "Not only are many 
of the commodities already produced wholly destroyed in these 
crises, but a good many of the instruments of production are sub- 
ject to a similar fate. In these crises a social epidemic breaks out 
such as in all earlier ages would have been accounted madness — 
the epidemic of overproduction. Society finds itself for the time 
being in a state of barbarism; it is as though a famine or a general 
war of extermination had cut off all supplies of the necessaries of 
life. Industry and commerce seem to be destroyed." 

The inner conflict in the capitalist organization of society is re- 
flected in the growing opposition between the two classes on which 
that organization rests — between the bourgeoisie and the prole- 
tariat. 

The bourgeois class, owing to the "centralization of capital," is 
represented by a constantly decreasing number of capitalists, and 
the proletariat by a constantly increasing mass of impoverished in- 
dividuals who sink deeper and deeper in misery. "The modern 
worker, instead of rising with the advance of industry, sinks deeper 
and deeper because of the conditions which his own class imposes 
upon him. The worker becomes a pauper, and pauperism develops 
even more quickly than population or wealth. This makes it abun- 
dantly clear that the bourgeoisie is incapable of remaining the ruling 
class in society, and of forcing society to accept the conditions of 
its existence as a general law regulating the existence of society as 
a whole. The bourgeoisie is incapable of bearing rule because it is 
unable to ensure for its slaves a bare existence, because it is forced 
to place them in a position w^here, instead of maintaining society, 
society must maintain them." It is the miser}' here mentioned that 
produces rebellion ; the proletariat rises against the ruling class. 



PROJECTS OF SOCIAL REFORM 747 

And it is able to do this because it has been "trained, imited and 
organized" by "the very mechanism of the process of capitaHst pro- 
duction:" "The hour of capitahst property has struck. Those who 
have expropriated others are now themselves expropriated." 
"Society will openly and directly take possession of the means of 
production" and the difficulties inherent in the capitalistic system 
will be removed. To take hold of power in this way, and so to in- 
troduce a new economic organization, will be possible because all 
the necessary conditions will have been created by the capitalist or- 
ganization — "constantly increasing co-operation in labour, applica- 
tion of technical knowledge, the derivation of the maximum produce 
from the soil, the transfonnation of the instruments of labour into 
such as may be used in common by many workers, the inclusion 
of all peoples in the net of the world market." 

This broad theory of evolution comprises a number of single 
theories. 

(i) The Theory of Concentration was adopted by Marx from 
Louis Blanc. Marx enlarged and illustrated it in a most brilliant 
fashion. The theor}^ lays it down that under the pressure of the 
competition inherent in the capitalist system, capitalist undertaking 
completely drives out the methods of production which existed in 
pre-capitalistic times ; it swallows up the small, independent produc- 
ers ; and then "one capitalist destroys many," or "many capitalists 
are expropriated by a few," i. e., undertakings on a large scale pre- 
vail more and more, and economic development tends to bring about 
a state of things where everything is controlled from one centre. 

(2) The Theor>' of Socialization is closely connected with that 
of concentration. It asserts that capitalist development will event- 
ually produce all the conditions necessary for bringing about a so- 
cialist, or communist, order of economic life. In other words, the 
theory holds that the elements of the coming economic system are 
maturing within the frame-work of Capitalism.. This theory, which 
is clearly of extreme importance for the foundation of the realistic 
standpoint, is of all the teachings of Marx and Engels most char- 
acteristically theirs. Separating its component parts, it may be de- 
scribed as follows : 

By utilizing improved processes in production in the capitalist 
organization of industry, it is possible to increase the productivity 
of the labour of society, and thus develop the productive powers of 
society. In this way, "by a wise distribution of work, there is a 
possibility — for the first time in the history of mankind — not only 
of producing sufficient for the necessary subsistence of all the mem- 
bers of society and for setting aside a reserve, but also of giving 



748 CURRENT ECONOMIC PROBLEMS 

each one sufficient leisure, sO' that what is of value in culture, sci- 
ence, art, social intercourse and so forth, may continue, and be 
turned from being a mjonopoly of the ruling class into the common 
possession of the whole of society. This is the important point. 
For as soon as the productive power of human labour has developed 
thus far, there is no longer any reason for the existence of a ruling 
class. 

(3) The Theory of Accumulation lays it down that the number 
oi great capitalists is on the decrease. 

(4) The Theory of Pauperization asserts that the intellectual 
and material condition of the proletariat under the capitalist system, 
instead of improving, grows constantly worse and worse. 

(5) The Theory of Self-Destruction asserts that Capitalism is 
digging its own grave. The occurrence oi commercial crises, com- 
ing as they do with constantly increasing force, proves conclusively 
the failure of the prevailing economic system to maintain its pre- 
dominance. The crises are the symptoms of the bankruptcy of the 
existing social order; and one day they will become so extensive 
that recovery will become quite impossible. 

362. The Economic Failure of Capitalism^^ 

BY J. RAMSAY MACDONAIvD 

Commercialism is a phase in the evolution of industrial organ- 
isation, and is not its final form. It arose when nations were suffi- 
ciently established to make national and international markets pos- 
sible, and it created classes and interests which separated them- 
selves from the rest of the community and which proceeded to but- 
tress themselves behind economic monopoHes, social privileges, polit- 
ical power. The new industrial regime supplanted feudalism when the 
historical work of feudalism was done and it had ceased to be useful, 
and proceeded to build up a method of wealth production and distri- 
bution regulated by nothing but the desire for individual success and 
private gain. The new power lost sight of social responsibilities and 
social coherence. The interests of the individual capitalist, of the 
class of capitalists, of the property owners, were put first, and those 
of the community as a whole were subordinated. It was hoped, 
that by the individual capitalist pursuing his own interest national 
well-being would be served. The error soon reaped its harvest of 
misery, when women and children were dragged into the factories 
late in the eighteenth and early in the nineteenth centuries, when 
people were gathered into foul industrial towns, and when only 

^^The Socialist Movement, 94-99- Copyright by Henry Holt & Co. (1911)- 



PROJECTS OF SOCIAL REFORM 749 

human endurance limited the length of the working day. So sep- 
arate had become the interests of the nation from those of the prop- 
ertied classes that the latter found profit from the degradation and 
deterioration of the population. It mattered not to the cotton own- 
er of Lancashire a hundred years ago what became of the children 
who were working in his factories, or later on, what became of the 
women who took their places. When one "hand" died another 
"hand'' was ready to step intO' his place, and whether his life was 
long or short, sad or merry, the machines which he tended spun out 
their enormous profits, and the owner saw no reason to believe that 
the day of his prosperity was short. 

The system certainly solved the problem of production. Under 
its whips and in search of its prizes, mechanical invention proceeded 
apace, labour was organised and its efficiency multiplied ten, twenty, 
an hundred fold. Statistics in proof of this live with the wonder 
that is in them. That twenty men in Lancashire to-day can make 
as much cotton as the whole of the odd cotton-producing Lancashire 
put together; that 1,000 shoe operatives in Leicester can supply a 
quarter of a million people with four pairs of boots a year ; that 
120 men in a mill can grind enough flour to keep 200,000 people's 
wants fully supplied, seem to come from the pages of romance 
rather than from' the sober history of industry. Commercialism has 
written those pages, and they are its permanent contribution to 
human well-being. 

As time went on, however, it was seen that this wonderful sys- 
tem of production was quite unable to devise any mechanism of 
distribution which could relate rewards to deserts. Distribution was 
left to the stress and uncertainty of competition and the struggle 
of economic advantages. The law of the survival of the fittest was 
allowed to have absolute sway, under circumstances which deprived 
it of moral value. The result was that national wealth was heaped 
up at one end over a comparatively small number of people and 
lay thinned out at the other end over great masses of the population. 
At one end people had too much and could not spend it profitably, 
at the other end they had too little and never gained that mastery 
of things which is preliminary to well-ordered life. Moreover, even 
many of those who poissessed held their property on such precarious 
tenure that possession gave them little security and peace of mind. 
Prosperity was intermittent both for capital and labour. 

Then conscious effort to rectify the chaos began to show itself. 

The national will protected the national interests through factory 

.and labour legislation, and at the same time the chaos within the 



7 so CURRENT ECONOMIC PROBLEMS 

system was being modified by the life of the system itself. Com- 
petition worked itself out in certain directions, and cooperation in 
the form of trusts came to take its place, as nature turns to hide 
up the traces of war in a country that has been fought over. This 
new organization is more economical and may steady to some ex- 
tent the demand for labour; but it means that economic power is 
being placed in the hands of a few. That is too dangerous in the 
eyes of the Socialist. Its operation is too uncertain. From his very 
nature the monopolist is an exploiter. He grasps the sceptre of 
state, as well as the sceptre of industry. He sits in Parliament as 
well as in the counting-house. He becomes a powerful citizen as 
well as a masterful captain of industry. He raises in a most acute 
form the problem of how the community can protect itself against 
interests being created round its exploitation and enslavement. Com- 
petition solves its own problems and leaves those of monopoly in 
their place. 

Surveying the same field with an eye on the moral fruits which 
it has borne, the Socialist once more discovers weeds in plenty. 
The familiar methods of adulteration and of all' forms of sharp 
dealing, both with work-people and with customers, pass before his 
eyes in disquieting masses. Honesty on this field is not the best 
policy. Materialist motives predominate. Birth and honour bow 
to wealth. Wealth can do' anything in "good" society to-day — even 
to the purchase of wives as in a slave market. A person may be 
vulgar, may be uncultured, may be coarse and altogether unpleas- 
ing in mind and manner but, if he has money, the doors of honour 
are thrown open to him, the places of honour are reserved for his 
occupation. The struggle for life carried on under the conditions 
of commercialism means the survival of sharp wits and acquisitive 
qualities. The pushful energy which brings ledger successes sur- 
vives as the "fittest" under commercialism. Capitalism has created 
a rough and illworking mechanism of industry and a low standard 
of value based upoii nothing but industrial considerations, and it has 
done its best to hand over both public and private values to be 
measured by this standard and to be produced by this mechanism. 

But the controlling influences which have been brought to bear 
upon it — both those of a political character from without and those 
of an industrial character from within — are the foreshadowings 
of a new system of organization. Commercialism lays its own 
cuckoo egg in its nest. Every epoch produces the thought and the 
ideals which end itself. Like a dissolving view on a screen, com- 
mercialism fades away and the image of Socialism comes out in 
clearer outline. 



PROJECTS OF SOCIAL REFORM 751 

D. THE CASE FOR SOCIALISM 
363. The Distinction between Socialism and Communism^" 

BY M. TUGAN-BARANOWSKY 

The distinction between SociaHsm and Communism is commonly 
thought to he in that Sociahsm demands only that the means of pro- 
duction be transferred to the comimunity, admitting private prop- 
erty in objects of use, whilst Communism claims complete abolish- 
ment of private property. But this is not quite correct. In the first 
place it is not possible to draw exact boundaries between means of 
production and objects of use. Nor is it correct to maintain that 
Sccialismi demands the socialization of all implements of work, or 
means of production. Most socialists assign to every family, a 
separate house, involving individual possession of means oi pro'- 
duction, for instance, utensils, tableware and books not read for a 
pastime. Even under Socialism certain instruments of prO'duction 
retain the quality of private property. 

But there are a great many objects the private possessions of 
which collectivist society can by no means grant. Many things serv- 
ing for immediate use and enjoyment, museums, gardens, etc., al- 
ready form objects of public property. Under a socialistic arrange- 
ment this class will be considerably expanded. In such a social state 
there will be three classes of objects of use: one belonging to the 
community as such, to the use of which all shall have free access ; 
one likewise social property, the individual use of which shall be 
granted for a certain compensation; and one shall consist oif objects 
possessed by individuals as private property. 

But even communism does not include the complete disappear- 
ance of property. The organization of social production, to what- 
ever extent it may develop, will find on its way many an object 
of use, which owing to its very nature must be left in individual 
possession, for instance clothing. However broadly the principle of 
Communism may be carried out, it will never succeed in dressing two 
individuals in one coat at one and the same time, and every coat 
must therefore practically be the property of him who wears it. 

The principle distinction between Socialism and Communism 
cannot, therefore, lie in the criterion referred to. In view of this 
fact many are inclined to identify the two. It is, however, not im- 
possible to mark out the point of difference between these systems. 
Amongst collectivist systems it is easy to discern two fundamental 

^"Adapted from Modern Socialism in Its Historical Development, 14-18 
(190S). 



752 CURRENT ECONOMIC PROBLEMS 

types. According to one the individual income is adjusted by de- 
termining the sum total the individual may dispose of to satisfy his 
wants. According to the other the very notion of income as a 
determined value is rejected, the immediate wants only being regu- 
lated or recognized as absolutely free. Under the order of the first 
type the distribution of products proceeds by means of a money 
system, were it but an ideal one ; every individual spends his in- 
come ; everything must have its price. In other words, money as a 
standard of value and purchasing power represents an indispensable 
organ of distribution; whereas in the organization of the second 
type, in which illimited freedom, of consumption is admitted, and 
not the income, but the use it is put to is being controlled, money 
as an instrument of distribution is not at all necessary. Social 
economy of the first type supposes the use of money, while that of 
the second type has no use for money at all. 

364. The Central Aim of Socialism^^ 

BY THOMAS KIRKUP 

The central aim of socialism is to terminate the divorce of the 
workers from the natural sources of subsistence and of culture. 
The socialist theory is based on the historical assertion that the 
course of social evolution for centuries has gradually been to ex- 
clude the producing classes from the possession oi land and capital, 
and to establish a new subjection, the subjection of workers who 
have nothing to depend on but precarious wage-labour. Socialists 
maintain that the present system leads inevitably to social and 
economic anarchy, to the degradation of the working man and his 
family, to the growth of vice and idleness among the wealthy classes 
and their dependants, to bad and inartistic workmanship, to inse- 
curity, waste, and starvation; and that it is tending more and more 
to separate society into two classes, wealthy milhonaires confronted 
with an enormous mass of proletarians, the issue out of which must 
either be socialism or social ruin. To avoid all these evils and to 
secure a more equitable distribution oi the means and appliances 
of happiness, socialists propose that land and capital, which are the 
requisites of labour and the sources of all wealth and culture, should 
be placed under social ownership and control. 

In thus maintaining that society should assume the management 
of industry and secure an equitable distribution of its fruits, social- 
ists are agreed ; but on the most important points oi details they 
differ very greatly. They differ as tO' the form society will take 

^^Adapted from A History of Socialism, 8-12 (1900). 



PROJECTS OF SOCIAL REFORM 753 

in carrying out the socialist programme, as to the relation of local 
bodies to the central government, and whether there is to be any 
central government, or any government at all in the ordinary sense 
of the word, as to the influence of the national idea in the society 
of the future, etc. They differ also as to what should be regarded 
as an "equitable" system of distribution. 

Still, it should be insisted that the basis of socialism is economic, 
involving a fundamental change in the relation of labour to land and 
capital — a change which will largely aft'ect production, and will en- 
tirely revolutionize the existing system of distribution. But, while 
its basis is economic, socialism implies and carries with it a change in 
the political, ethical, technical and artistic arrangements and insti- 
tutions of society, which would constitute a revolution greater than 
has ever taken place in human history, greater than the transition 
from the ancient to the mediaeval world, or from the latter to the 
existing order of society. 

In the first place, such a change generally assumes as its political 
complement the most thoroughly democratic organization oi society. 
Socialism., in fact, claims tO' be the economic complement of democ- 
racy, maintaining that without a fundamental economic change polit- 
ical privilege has neither meaning nor value. 

In the second place, socialism naturally goes with an unselfish 
or altruistic system oif ethics. The most characteristic feature of 
the old societies was the exploitation of the weak by the strong 
under the systems of slavery, serfdom, and wage-labour. Under the 
socialistic regime it is the privilege and duty of the strong and 
talented to use their superior force and richer endowments in the 
service of their fellow-men without distinction of class, or nation, or 
creed. In the third place, socialists maintain that, under their sys- 
tem and nO' other, can the highest excellence and beauty be re- 
alized in industrial production and in art ; whereas under the present 
system beauty and thoroughness are alike sacrificed to cheapness, 
which is a necessity of successful competition. 

Lastly, the socialists refuse to admit that individual happiness 
or freedom or character would be sacrificed under the social ar- 
rangements they propose. They believe that under the present sys- 
tem a free and harmonious development of individual capacity and 
happiness is possible only for the privileged minority, and that 
socialism alone can open up a fair opportunity for all. They be- 
lieve, in short, that there is no opposition whatever between social- 
ism and individuality rightly understood, that these two are com- 
plements the one of the other, that in socialism alone may every 
individual have hope of free development and a full realization of 
himself. 



754 CURRENT ECONOMIC PROBLEMS 

365. Property and Industry under Socialism^^ 

BY JOHN SPARGO 

Another phase of our discussion concerns the industrial organ- 
ization of the SociaHst State, and the place in it of private industrial 
enterprise. Socialism does not involve the absolute monopolization 
of production and distribution, and the total suppression of private 
initiative and enterprise in these spheres. The economic organiza- 
tion of the SociaHst State will undoubtedly include production and 
distribution by individuals and voluntary co-operative groups, as 
well as collective production and distribution under the auspices 
and control of the State itself. 

In all our thought upon this question we must bear in mind that 
the two principal economic arguments for socialization are : First, 
the elimination of economic parasitism, the exploitation of the 
wealth producers by a class of non-producers, and, second, the 
attainment of greater efficiency through the elimination of the 
wastefulness inseparable from capitalist production, especially in its 
competitive stages. 

The first of these reasons constitutes the prime motive of the 
Socialist movement. The second is the raison d'etre of the develop- 
ment of monopoly. Every thoughtful Socialist recognizes that cap- 
italist production involves an enormous amount of waste, and that 
incalculable gains would result from the socialization of industry. 

The greater part of the production and distribution of our pres- 
ent economic system is so organized that the exploitation of the 
workers engaged in it is inevitable. 

It is a fundamental condition of Socialism that all such processes 
and functions be socialized. In other words, it is a sine qua non 
of Socialism that they be so organized as to eliminate profit-making 
by investors. This does not mean that they must all be taken over 
by the supreme political organization which we call the State. Nor 
does it mean that they must all be socialized at once. A few advo- 
cates of Socialism, more zealous than intelligent, seem to believe 
that there will be a grand transformation day upon which all the 
functions of capitalism will be socialized, but that idea is not held by 
thoughtful Socialists. 

Great organizations like the Steel Trust represent the progress 
already made in the direction of Socialism through one channel. 
Measures for the government regulation of monopolies now being 
advocated by conservative non-Socialists indicate an increasing 
readiness to make progress in the same direction through another 

^^ Adapted from Applied Socialism, 1 16-129. Copyright by B. W. Huebscli 
(1912). 



PROJECTS OF SOCIAL REFORM 755 

channel, the channel of political organization. The process of so- 
cialization is essentially an evolutionary one. 

The incentive which operates to bring about the socialization of 
industries conducted for profit obtained frorn the exploitation of 
the workers, obviously does not exist in the case of petty, individu- 
alistic industries which do not depend upon such exploitation. The 
market gardener who cultivates his own land and sells his produce 
without exploiting the labor of others, and the individual craftsman 
who does all his own work, likewise without exploiting the labor of 
others, illustrate very clearly the distinctive character of enterprises 
which are not characterized by class exploitation. There is a much 
larger number of these enterprises, both productive and distributive, 
than is generally recognized. It is exceedingly probable that a large 
number of them will continue to exist, as individual enterprises, in 
the Socialist regime. 

It seems probable, then, that in the Socialist State three forms of 
economic enterprise will co-exist, namely (i) production and dis- 
tribution on a large scale under the auspices of the government — 
national, state or municipal; (2) production and distribution by co- 
operative associations; (3) production and distribution by private 
individuals. To regulate properly the relation of these three di- 
visions will be the supreme task of the democratic statesmanship of 
the future. 

There are some economic activities which from their very nature 
require a national organization for their most efficient direction. 
This is true of railways, telegraphs, postal and express services 
among distributive agencies, and of mining, oil production, and 
steel manufacture among the productive functions. There are other 
economic activities which can be most efficiently directed by the 
smaller unit, the State or Province, and yet others which can be 
most efficiently conducted by the still smaller political unit, the city 
or commune. 

It is impossible to make a rigid classification of the economic 
functions and decide to which political unit each will be entrusted. 
Moreover, were such a classification possible it would not be of 
much value. The Socialist State will inherit the economic organ- 
ization of the capitalist system, and will modify it in the light of 
its experience and according to the needs of its economic develop- 
ment. The economic functions entrusted at first to municipalities 
may later be transferred to the larger units, the States and prov- 
inces, the citizens choosing a greater degree of centralization in the 
interests of efficiency. On the other hand, a certain amount of de- 
centralization may take place. 



756 CURRENT ECONOMIC PROBLEMS 

The State, using the term in its most comprehensive sense to 
cover the whole political organization of society, thus assumes the 
functions noAv performed by the capitalist class in the employment, 
direction and superintendence of labor. Naturally, the relations of 
the State to the individual worker will differ materially from those 
which now exist between employer and employe. The position of 
the worker will be somewhat analogous to that of the employe who 
is also a shareholder in the concern for which he works. Misunder- 
standings and conflicts between them are, therefore, not only pos- 
sible but highly probable — perhaps inevitable. 

Insepara:ble from such a system would be the danger of conflict 
between the decisions of the workers engaged in important branches 
of the industrial organization and the interests of the people as a 
whole. 

It is very evident therefore, that some way must be found to base 
the industrial organization of the Socialist State upon the dual basis 
of the interests of the whole citizenry on the one hand, and the 
special interests of the workers as such upon the other hand. One 
Socialist writer has gravely proposed the establishment of an elec- 
tive "industrial parliament of two chambers, in one of which repre- 
sentation will be according to numbers, while in the other every 
industry will be represented irrespective of size." 

One weakness is common to all such ingenious devices. They 
are all essentially Utopian. Based upon abstract principles, they fail 
to take into account the important fact that society is an organism 
subject to the laws of evolution. Social institutions are never the 
result of the deliberate adoption of clever inventions. It is easy 
enough and harmless enough for the believer in a certain form of 
social organization to sit down and ask himself : "What institutions 
and what methods wnW best serve that form of social organization 
in which I believe?" but we must not be disappointed if quite other 
institutions and methods are developed. 

Socialism is the child of capitalism. If the Socialist State is 
ever realized at all it will be a development of the capitalist State, 
not a new creation. Many of us believe that the transition from 
capitalism will be a tranquil process, stretching over a period of 
many years ; that the "Social Revolution" of which we hear so much, 
instead of being a terrible upheaval attended with an enormous 
amount of violence and suffering, which even the stoutest hearts 
must anticipate with anxiety, is a long-drawn process oi social effort 
and experiment. The Social Revolution is not a sanguinary episode 
which must attend the birth of the new social order. It is a long 
period of efl:ort, experiment and adjustment, and is now taking 
place. 



PROJECTS OF SOCIAL REFORM 757 

The acceptance of this evolutionary view will save us from 
wasting time and energy in devising social institutions and methods 
to conform with abstract principles. Instead, we shall seek the 
beginnings of such institutions and methods as the new epoch will 
require within the present order, together with the beginning of the 
new epoch itself. 



E. SOCIALIST ARGUMENTS FOR THE MASSES 
366. Capitalism — A Vampire System-^ 

BY george; e;. littlefield 

1. Under capitalism, labor of brain and hand — human life- 
power — is a mere commodity. The world's workers are wage-slaves, 
compelled to sell time portions of themselves in the auction marts 
of competition to master bidders, lowering their price in the rivalry 
for jobs — for the opportunity to live — until it is just enough to equal 
the bare cost of living and reproduction — the iron law of wages. 

2. Human labor, applied to natural resources, creates all value. 

3. The unpaid portion of labor is surplus value or capital, with 
which the exploiting capitalists become masters of land, buildings, 
machinery, and raw material — all the means of production and dis- 
tribution that labor depends upon for existence — therefore masters 
also of the wage-slaves. 

4. The withholding of this surplus value from labor prevents 
the exploited workers from buying or consuming but a fraction of 
their full product — hence periodic over-production and consequent 
"hard times," ever becoming more severe and chronic, until finally 
the whole capitalist system must smother in its own "prosperity." 

5. Capitalism is a vampire system. While it absorbs the labor 
and life of the competitive wage-slaves, the competing capitalist 
masters, preying one upon another, destroy each other until thus 
we have but a few monster vampires sucking the last dregs of vitality 
from a vastly increased proletariat, and finally comes the crisis — 
the sin of wageism is death — the collapse of the capitalist system. 
Labor unions and fake legislation for the strangling little capitalists 
(like the impotent railroad-control law) may palliate and prolong 
the present agony for a brief time, but the end is fatally doomed as 
is the diseased person who will not cut out his life-absorbing cancer. 
The huge modern plutocratic parasites, inflated with interest, rent, 
and profits, must finally expire with the death of what they feed 

"From Capitalism to Socialism, Flashlight Number 7 (1905). 



758 CURRENT ECONOMIC PROBLEMS 

upon — wageism. So the vampire patricians of ancient Rome sapped 
the plebeian and slave basis of their economic system and the Empire 
fell in 476. 

6, No system of civilization can advance or live when a feasting, 
reveling class drinks from the toilers' veins while riding on their 
backs. The knell of its own death is now being rung by capitalism 
which hypocritizes religion ; perverts morality ; makes the law unjust ; 
prostitutes education ; promotes war ; corrupts politics ; practices 
robbery, swindling, and gambling as a business ; betrays friendship ; 
sends love out street-walking and makes marriage mercenary ; calls 
attic lodgings, slum cellars, corporation shacks, and hobo hovels 
"homes" ; offers little children to the moloch of commercialism, and 
in the mad scramble for its dope incentive — dollars — materializes 
the rich, vulgarizes the well-to-do, and brutalizes the poor. Such 
is the result of the economic determinism of capitalism. 



367. "My Papa Is a Socialist"^* 

BY HARVEY p. mover 

My papa is a Socialist, my mamma, too, and I, 
And if you'll wait a minute now, I'll tell the reason why; 
I'm sure that when you understand, you certainly will see, 
You'd better all be Socialists, and vote with pa and me. 

You see this earth is long and wide, good things above, below. 
And there are lots of people, too, who want to make things go ; 
Besides, we're all just quite alike, need food and clothes and rest. 
And if we all were Socialists, we all would share earth's best. 

But now John D. owns all the oil, most banks, and railroads, too. 

And then a few own all the land, so what can poor folks do 

But tramp and starve and beg for jobs, and work and work and 

work? 
And all the wealth we make, but scraps, we give the wealthy shirk. 

Now isn't every papa, most, the very biggest goose, 

To give away most all he makes to men who don't produce? 

So that a few rich families may all be living fine. 

While all we weary working folks must suffer, want, and pine. 

"*From Songs of Socialism, p. 45. Copyright by the author. Published 
by the Co-operative Printing Co. (1906). 



PROJECTS OF SOCIAL REFORM 759 

And then they do such foolish things, I often wonder why 

They "strike" and lose their jobs, and let us freeze and starve and 

cry; ^ 
When, if all joined the Socialists, in four years more or five 
We'd all be wealthy partners in the world's great working hive. 

For if they'd stop to think, they'd see how easy 'twas to make, 
Together, all we'd want to have, and what we'd make, we'd take ; 
So that the children, all alike, our papas, mammas, too. 
Would all enjoy earth's happiness, as Socialists want all to. 

So papa is a Socialist, mamma, we children, too ; 

We want to make all children rich and happy, too, don't you? 

Good food and homes, nice shoes and clothes, we children want, 

don't you ? 
So all of us are Socialists ; please, won't you be one too ? 



368. The Capitalist's Ten Commandments-^ 

BY W. WILLIS HARRIS 

I. I am Capital, thy Master, that brought thee out of the Land 
of Liberty into a State of Slavery. Thou shalt not become thine 
own Master nor have any other Master but me. 

IL Thou shalt not create any wealth, nor any likeness of any 
wealth that is in Heaven above, or that is in Earth beneath, or that is 
in the waters under the Earth, unless I can make a profit out of it. 
Thou shalt bow thyself down under my oppression and serve me, 
for 1, Capital, am a jealous Master and visit the poverty of the 
fathers upon the children unto the third and fourth generations of 
those that create wealth for me, and show mercy unto the thousands 
of sycophants that love me and help me to share the spoils of Labor. 

in. Thou shalt not produce wealth for thyself, for L Capital, 
will not hold him guiltless that attempts to do so in vain. 

IV. Keep the Labor Days, and sanctify them ; as I, Capital have 
commanded thee, lest I throw thee out of employment. Four-and- 
a-half days thou shalt work for me, and one-and-a-half for thyself. 
But the seventh day is a rest day for Labor to recoup his strength. 
In it thou shalt not do any work, thou, nor thy son, nor thy daughter, 
nor thy wife, unless they be menial servants or minister to my 
comforts. And remember that thou art my slave, therefore do not 

^^ Adapted from Progressive Thought, II, No. 5, pp. 13-14 (i 



76o CURRENT ECONOMIC PROBLEMS 

attempt to enjoy thyself lest thou over-exert thyself and be unable 
to produce a profit for me next week. 

V. Honor Landlordism and Usury, my co-partners, as I, Capi- 
tal, have commanded thee, that thy days may be short in the Land 
in which thou art born. 

VL Thou shalt commit murder for my sake only. 

VIL Thou shalt give thy daughters in prostitution and thy 
wife in adultery to me. 

VIIL Thou shalt not steal, that being the right divine of 
Capital. 

IX. Thou shalt bear false witness against thy neighbor — if he 
be a Socialist. 

X. Thou shalt not desire the full products of thy labor, neither 
shalt thou covet the Land of thy birth, nor the stored-up wealth of 
past generations, nor the idleness, luxury, and privileges of the 
wealthy, nor anything that is in possession of the capitalist. 

369. A Confession of Faith^® 

I believe in Capital, the ruler of body and mind. 

I believe in Profit, His Right-hand Bower, and in Credit, His 
Left-hand Bower, both of which proceed from and are one with 
Him. 

I believe in Gold and Silver, which melted in the crucible, cut 
up into bullion, and stamped in the mint, make their appearance in 
the world as coin, but, after having rolled over the earth, and being 
found too heavy, descends into the vaults of the Banks, and re- 
ascends in the shape of Paper Money. 

I believe in Dividends, in 5 per cents, 4 per cents and 3 per cents, 
and also in smaller per cents, that are shaved from notes. 

I believe in National Debts, which secure Capital against the 
risks of trade, industry and the fluctuations of the money market. 

I believe in Private Property, the fruit of the labor of others ; 
and I also believe in its existence from and for all time. 

I believe in the necessity of Misery — the furnisher of wage- 
slaves, and the mother of surplus labor. 

I believe in the eternity of the Wage System, which setteth the 
workingman free from all the cares of holding property. 

I believe in the extension of the hours of work, and in the Reduc- 
tion of wages ; and I also believe in the adulteration of goods. 

I believe in the holy dogma : "Buy Cheap, Sell Dear," and 
thereby in the fundamental principles of our sacrosanct Church, as 
revealed by professional Political Economy. Amen ! 

^"Adapted from Progressive Thought, II, No. 5, p. 14 (i{ 



PROJECTS OF SOCIAL REFORM 761 

F. SOCIALIST PROGRAMS 
370. The National Platform of the Socialist Party" 

The representatives of the Socialist Party in National Convention 
at Indianapolis declare that the capitalist system has outgrown its 
historical function, and has become utterly incapable of meeting the 
problems now confronting society. We denounce this outgrown 
system as incompetent and corrupt and the source of unspeakable 
misery and suffering to the whole working class. 

Under this system the industrial equipment of the nation has 
passed into the absolute control of a plutocracy which exacts an 
annual tribute of milhons of dollars from the producers. Unafraid 
of any organized resistance, it stretches out its greedy hands over 
the still undeveloped resources of the nation — the land, the mines, 
the forests and the water-powers of every State in the Union. 

In spite of the multiplication of labor-saving machines and im- 
proved methods in industry which cheapen the cost of production, 
the share of the producers grows ever less, and the prices of all 
the necessities of life steadily increase. The boasted prosperity of 
this nation is for the owning class alone. To the rest it means 
only greater hardship and misery. The high cost of living is felt 
in every home. Millions of wage-workers have seen the purchasing 
power of their wages decrease until life has become a desperate 
battle for mere existence. 

Multitudes of unemployed walk the streets of our cities or 
trudge from State to State awaiting the will of the masters to move 
the wheels of industry. 

The farmers in every State are plundered by the increasing 
prices exacted for tools and machinery and by extortionate rents, 
freight rates, and storage charges. 

Capitalist concentration is mercilessly crushing the class of small 
business men and driving its members into the ranks of propertiless 
wage-workers. The overwhelming majority of the people of Am- 
erica are being forced under a yoke of bondage by this soulless in- 
dustrial despotism. 

It is this capitalist system that is responsible for the increasing 
burden of armaments, the poverty, slums, child labor, most of the in- 
sanity, crime, and prostitution, and much of the disease that afflicts 
mankind. 

Under this system the working class is exposed to poisonous con- 
ditions, to frightful and needless perils to life and limb, is walled 
around with court decisions, injunctions and unjust laws, and is 

^''Adopted at Indianapolis, May 16, 1912. 



762 CURRENT ECONOMIC PROBLEMS 

preyed upon incessantly for the benefit of the controlling oligarchy 
of wealth. Under it also, the children of the working class are 
doomed to ignorance, drudging toil and darkened lives. 

In the face of these evils, so manifest that all thoughtful observ- 
ers are appalled at them, the legislative representatives of the Re- 
publican, Democratic, and all reform parties remain the faithful 
servants of the oppressors. Measures designed to secure to the wage 
earners of this nation as humane and just treatment as is already 
enjoyed by the wage-earners of all other civilized nations have been 
smothered in committee without debate, and laws ostensibly designed 
to bring relief to the farmers and general consumers are juggled 
and transformed into instruments for the exaction of further tribute. 
The growing unrest under oppression has driven these two old 
parties to the enactment of a variety of regulative m.easures, none 
of which has limited in any appreciable degree the power of the 
plutocracy, and some of which have been perverted into means for 
increasing that power. Anti-trust laws, railroad restrictions and 
regulations, with the prosecutions, indictments and investigations 
based upon such legislation, have proved to be utterly futile and 
ridiculous. Nor has this plutocracy been seriously restrained or 
even threatened by any Republican or Democratic executive. It has 
continued to grow in power and insolence alike under the admin- 
istrations of Cleveland, McKinley, Roosevelt and Taft. 

In addition to this legislative juggling and this executive con- 
nivance, the courts of America have sanctioned and strengthened 
the hold of this plutocracy as the Dred Scott and other decisions 
strengthened the slave power before the Civil War. 

We declare, therefore, that the longer sufferance of these con- 
ditions is impossible, and we purpose to end them all. We declare 
them to be the product of the present system in which industry 
is carried on for private greed, instead of for the welfare of society. 
We declare, furthermore, that for these evils there will be and can be 
no remedy and no substantial relief except through Socialism, under 
which industry will be carried on for the common good and every 
worker receive the full social value of the wealth he creates. 

Society is divided into warring groups and classes, based upon 
material interest. Fundamentally, this struggle is a conflict between 
the two main classes, one of which, the capitalist class, owns the 
means of production, and the other, the working class, must use 
these means of production on terms dictated by the owners. 

The capitalist class, though few in numbers, absolutely controls 
the Governmient — legislative, executive and judicial. This class 
owns the machinery of gathering and disseminating news through 



PROJECTS OF SOCIAL REFORM 763 

its organized press. It subsidizes seats of learning — the colleges 
and schools — and even religions and moral agencies. It has also 
the added prestige which established customs give to any order of 
society, right or wrong. 

The working class, which includes all those who are forced to 
work for a living, whether by hand or by brain, in shop, mine or 
on the soil, vastly outnumbers the capitalist class. Lacking effec- 
tive organization and class solidarity, this class is unable to enforce 
its will. Given such class solidarity and effective organization, the 
workers will have the power to make all laws and control all in- 
dustry in their own interest. 

All political parties are the expression of economic class inter- 
ests. All other parties than the Socialist Party represent one or an- 
other group of the ruling capitalist class. Their political conflicts 
reflect merely superficial rivalries between competing capitalist 
groups. However they result, these conflicts have no issue of real 
value to the workers. Whether the Democrats or Republicans win 
politically, it is the capitalist class that is victorious economically. 

The Socialist Party is the political expression of the economic 
interests of the workers. Its defeats have been their defeats, and 
its victories their victories. It is a party founded on the science and 
laws of social development. It proposes that, since all social neces- 
sities today are socially produced, the means of their production 
shall be socially owned and democratically controlled. 

In the face of the economic and political aggressions of the cap- 
italist class the only reliance left the workers is that of their eco- 
nomic organizations and their political power. By the intelligent 
and class-conscious use of these they may resist successfully the 
capitalist class, break the fetters of wage slavery, and fit themselves 
for the future society, which is to displace the capitalist system. The 
Socialist Party appreciates the full significance of class organization 
and urges the wage earners, the working farmers and all other 
useful workers everywhere to organize for economic and political 
action, and we pledge ourselves to support the toilers of the fields 
as well as those in the shops, factories and mines of the nation in 
their struggle for economic justice. 

In the defeat or victory of the working class party in this new 
struggle for freedom lies the defeat or triumph of the common 
people of all economic groups, as well as the failure or the triumph 
of popular government. Thus the Socialist Party is the party of the 
present day revolution, which marks the transition from economic 
individualism to Socialism, from Wage slavery to free co-operation, 
from capitalist oligarchy to industrial democracy. 



764 CURRENT ECONOMIC PROBLEMS 

As measures calculated to strengthen the working class in its 
fight for the realization of its ultimate aim, the Co-operative Com- 
monwealth, and to increase the power of resistance against cap- 
italist oppression, we advocate and pledge ourselves and our elected 
officers to the following program: 

COLIvECTIVe; 0WN£^RSHIP 

I. The collective ownership and democratic management of 
railroads, wire and wireless telegraphs and telephones, express ser- 
vices, steamboat lines and all other social means of transportation 
and communication and of all large scale industries. 

2. The immediate acquirement by the municipalities, the States 
or the federal government of all grain elevators, stockyards, storage 
warehouses and other distributing agencies, in order to reduce the 
present extortionate cost of living. 

3. The extension of the public domain to include mines, quar- 
ries, oil wells, forests and water power. 

4. The further conservation and development of natural re- 
sources for the use and benefit of all the people : 

(a) By scientific forestration and timber protection. 

(b) By the reclamation of arid and swamp tracts. 

(c) By the storage of flood waters and the utilization of water 
power. 

(d) By the stoppage of the present extravagant waste of the 
soil and of the products of mines and oil wells. 

(e) By the development of highway and waterway systems. 

5. The collective ownership of land wherever practicable, and 
in cases where such ownership is impracticable, the appropriation 
by taxation of the annual rental value of all land held for specu- 
lation. 

6. The collective ownership and democratic management of the 
banking and currency systemi. 

UNEMPIvOYME^NT 

The immediate government relief of the unemployed by the ex- 
tension of all useful public works. All persons employed on such 
works to be engaged directly by the government under a workday 
of not more than eight hours and not less than the prevailing union 
wages. The government also to establish employment bureaus ; to 
lend, money tO' States and municipalities without interest for the 
purpose of carrying on public works, and tO' take such other meas- 
ures within its power as will lessen the widespread misery of the 
workers caused by the misrule of the capitalist class. 



PROJECTS OF SOCIAL REFORM 765 

INDUSTRIAL DE;MANDS 

The conservation of human resources, particularly of the lives 
and well-being of the workers and their families : 

1. By shortening the workday in keeping with the increased 
productiveness of machinery. 

2. By securing to every worker a rest period of not less than a 
day and a half in each week. 

3. By securing a more effective inspection of workshops, fac- 
tories and mines. 

4. By forbidding the employment of children under 16 years 
of age. 

5. By the co'-operative organization of industries in federal 
penitentiaries and workshops for the benefit of convicts and their 
dependents. 

6. By forbidding the interstate transportation of the products 
of child-labor, of convict labor and of all uninspected factories and 
mines. 

7. By abolishing the profit system in government work, and 
substituting either the direct hire of labor or the awarding of con- 
tracts to co-operative groups of workers. 

8. By establishing minimum wage scales. 

9. By abolishing official charity and substituting a non-con- 
tributory system of old age pensions, a general system of insurance 
by the State of all its members against unemjployment and invalid- 
ism and a system of compulsory insurance by employers of their 
workers, without cost to the latter, against industrial disease, acci- 
dents and death. 

POIvlTlCAIv DEMANDS 

The absolute freedom of press, speech, and assemblage. 

The adoption of a gradual income tax, the increase of the rates 
of the present corporation tax and the extension of inheritance taxes, 
graduated in proportion to the value of the estate and tO' nearness 
of kin — the proceeds of these taxes to be employed in the social- 
ization of industry. 

The abolition of the monopoly ownership of patents and the 
substitution of collective ownership, with direct rewards tO' inventors 
by premiums or royalties. 

Unrestricted and equal suffrage for men and women. 

The adoption of the initiative, referendum and recall and of 
proportional representation, nationally as well as locally. 

The abolition of the Senate and the veto power of the President. 



766 CURRENT ECONOMIC PROBLEMS 

The election of the President and the Vice-President by direct 
vote of the people. 

The abolition of the power usurped by the Supreme Court of the 
United States to pass upon the constitutionality of the legislation 
enacted by Congress, National laws to be repealed only by act of 
Congress or by the voters in a majority of the States. 

The granting of the right of suffrage in the District oi Colum- 
bia with representation in Congress and a democratic form of 
municipal government for purely local affairs. 

The extension of democratic government to all United States 
territory. 

The enactment of further measures for general education and 
particularly for vocational education in useful pursuits. The Bureau 
of Education to be made a department. 

The enactment of further measures for the conservation of 
health. The creation of an independent Bureau of Health with such 
restrictions as will secure full liberty for all schools of practice. 

The separation of the present Bureau of Labor from the Depart- 
ment of Commerce and Tabor and its elevation tO' the rank of a de- 
partment. 

Abolition of the Federal District Courts and the United States 
Circuit Courts of Appeals. State courts to have jurisdiction in all 
cases arising between citizens of the several States and foreign 
corporations. The election of all judges for short terms. 

The immediate curbing" of the power of the courts to issue in- 
junctions. 

The free administration of justice. 

The calling of a convention for the revision of the Constitution 
of the United States. 

Such measures O'f relief as we may be able to force from cap- 
italism are b^ut a preparation of the workers to seize the whole pow- 
ers of government in order that they may thereby lay hold of the 
whole system of socialized industry and thus come to their rightful 
inheritance. 

371. Municipal and State Program-^ 

I. LABOR MEASURERS 

1. Eight-hour day, trade-union wages and conditions in all 
public employment and on all contract work done for the city. 

2. Old-age pension, accident insurance, and sick benefits to be 
provided for all public employees. 

^^Drawn up by a committee appointed by the National Convention of the 
Socialist Party, May, 1912. See Socialist Campaign Book, 310-311 (1912). 



PROJECTS OF SOCIAL REFORM 767 

3. Special laws for the protection of both men, women, and 
children in mercantile, domestic, and industrial pursuits. 

4. Abolition of child labor. 

5. Pohce not to be used to break strikes. 

6. Rigid inspection of factories by local authorities for the 
improvement of sanitary conditions, lighting, heating, ventilating, 
and the Hke. Safety appliances required in all cases to protect the 
worker against dangerous machinery. 

7. Free employment bureaus to be established in the cities to 
work in co-operation with the state bureaus. Abolition of contract 
system and direct employment by the city on all public work. 

8. Free legal advice. 

9. The provision of work for the unemployed by the erection 
of model dwellings for workingmen; the paving and improvement 
of streets and alleys, and the extension and improvement of parks 
and playgrounds. 

II. HOME RUIvE 

Home rule for cities; including the right of the city to own 
and operate any and all public utilities; to engage in commercial 
enterprises of any and all kinds ; the right of excess condemnation, 
both within and outside the city, and the right of two or more cities 
to co-operate in the ownership and management of public utilities ; 
the city to have the right of issuing bonds for these purposes up to 
50 per cent of the assessed valuation, or the right to issue mortgage 
certificates against the property acquired, said certificates not to 
count against the bonded indebtedness of the city. 

III. MUNiciPAi, owne;rship 

The city to acquire as rapidly as possible, own and operate its 
public utilities, especially street-car systems, light, heat, and power 
plants, docks, wharves, etc. 

Among the things which may be owned and operated by the 
city to advantage are slaughter houses, bakeries, milk depots, coal 
and woods yards, ice plants, undertaking establishments, and crema- 
tories. 

On all public works, eight-hour day, trade-union wages, and pro- 
gressive improvements in the condition of labor to be established and 
maintained. 

IV. CITY PLATTING, PI^ANNING AND HOUSING 

I. The introduction of scientific city planning to provide for the 
development of cities along the most sanitary, economic, and attrac- 
tive lines. 



768 CURRENT ECONOMIC PROBLEMS 

2. The city to secure the ownership of land, to plat the same so 
as to provide for plenty of open space, and to erect model dwellings 
thereon to be rented by the municipality at cost. 

3. Transportation facilities to be maintained with special refer- 
ence to the prevention of overcrowding in unsanitary tenements and 
the creation of slum districts. 

V. PUBLIC he;ai.th 

1. Inspection of food. 

2. Sanitary inspection. 

3. Extension of free hospital and medical treatment. 

4. Child-welfare department, to combat death rate prevailing, 
especially in working-class sections. 

5. Special attention to eradication of tuberculosis and other 
contagious diseases. 

6. System of street toilets and public-comfort stations. 

7. Adequate system of public baths, parks, playgrounds, and 
gymnasiums. 

VI. PUBLIC EDUCATION 

1. Adequate number of teachers, so that classes may not be too 
large. 

2. Retirement fund for teachers. 

3. Adequate school buildings to be provided and maintained. 

4. Ample playgrounds with instructors in charge. 

5. Free textbooks and equipment. 

6. Penny lunches, and, where necessary, free meals and cloth- 
ing. 

7. Medical inspection, including free service in the care of 
eyes, ears, throat, teeth, and general health where necessary to insure 
mental efficiency in the educational work, and special inspection to 
protect the schools from contagion. 

8. Baths and gymnasiums in each school. 

9. Establishment of vacation schools and adequate night schools 
for adults. 

10. All school buildings to be open or available for the citizens 
of their respective communities, at any and all times, and for any 
purpose desired by the citizens, so long as such use does not interfere 
with the regular school work. All schools to serve as centers for 
social, civic, and recreational purposes. . 

VII. THE LIQUOR TRAFFIC AND VICE 

1. Socialization of the liquor traffic; the city to offer as sub- 
stitute for the social features of the saloon, opportunities for recrea- 
tion and amusement, under wholesome conditions. 

2. Abolition of the restricted vice districts. 



PROJECTS OF SOCIAL REFORM 769 

VIII. MUNICIPAI. MARKETS 

Municipal markets to be established where it is found that by 
this means a reduction may be secured in the cost of the necessities 
of Hfe. 

G. THE CASE AGAINST SOCIALISM 
372. The Transition to the Socialist State-^ 

BY O. D. SKELTON 

The first problem that faces the socialist — hoAV catch the hare — 
is primarily a question of tactics, but its solution largely determines 
the character and extent of the difficulties facing the collectivist 
commonwealth at the outset. Is the capitalist to be expropriated 
without indemnity, or to be offered compensation? The earlier hot- 
blooded demand for the expropriation oi the robber rich without 
one jot of payment is now heard more rarely in the socialist camp. 
This attitude was consistent with the catastrophic view of social 
evolution, the view that the revolution would be "an affair of twen- 
ty-four lively hours, with Individualism in full swing on Monday 
morning, a tidal wave of the insurgent proletariat on Monday after- 
noon, and Socialism in complete working order on Tuesday." But 
in these post-Darwinian days this naive expectation is untenable. 
With the growing admission that the new order must be established 
by degrees, it is seen that it would be impossible tO' expropriate 
certain capitalists and leave the rest in undisturbed possession. 
Further, forcible expropriation without indemnity would be impos- 
sible; even were thei great majority of the manufacturing proletariat 
won over to the policy, they could scarcely hope to overcome the 
determined resistance of the millions of farmers and the urban 
riiiddle class. 

If the other horn of the dilemma is then unanimously chosen, 
and the capitalists bought out at one hundred cents on the dollar, 
how is the condition of the poorer classes one jot improved? There 
will be heaped up an immense debt, a perpetual mortgage on the 
collective industr}' ; rent and interest will still remain a first charge, 
still extract "surplus labor" from the workers. Even if collectivist 
management were to prove every whit as efficient as capitalistic, 
the surplus for division among the workers would not be increased 
beyond that available to-day. Indeed, it would be diminished. To- 
day a great part of the revenue drawn in the shape of rent and in- 
terest is at once recapitalized, and makes possible the maintenance 

^"Adapted from Socialism: A Critical Analysis, 182-184. Copyright by 
Hart, Schaflfner & Marx (1911). 



770 CURRENT ECONOMIC PROBLEMS 

and extension of industry. A socialist regime could not permit the 
paid-off capitalists to utilize their dividends in this manner, increas- 
ing their grip on industry ; they would be compelled to spend it in 
an orgy O'f coinsumption. All provision for capital extension would 
therefore have to come out of what was left of the national divi- 
dend. The last state would be worse than the first. 

Recognizing this, various socialists have proposed, once the cap- 
ital has been appropriated, to put on the screws by imposing in- 
come, property, and inheritance taxes which will eventually wipe 
out all obligations against the state. In other words, they would 
imitate the humanitarian youngster who thoughtfully cuts off the 
cat's tail an inch at a time, to save it pain. Doubtless there are, 
within the existing order, great possibilities of extension of such 
taxes for the furtherance of social reform. Possibly our withers 
would be unwrung if the socialistic state confiscated the multimil- 
lionaire's top hundred million by a progressive tax. But the for- 
tunes of the multimillionaires, spectacular as they are and politically 
dangerous as they are, form^ but a small proportion of the total 
wealth. So soon as the tax came to threaten the confiscation of 
the small income as well as the great, the matter would again be- 
come one of relative physical force. 

373. Socialism and Inequality^" 

BY N. G. PIE;RS0N 

Under State socialism,, pure and simple, the Government of the 
country would assume the ownership of the instruments of pro- 
duction. We take it that this end might be achieved in the follow- 
ing manner. Just as at the present it already owns the postal sys- 
tem,, just as in certain countries it already owns and works the 
railways, manufactures cigars and matches, so it might successively 
assume the ownership, and undertake the working of all factories 
and workshops, all means- of transport, farms, fisheries, warehouses, 
and shops. In order to be able to form by degrees a staff of prop- 
erly qualified officials., the State would have to be careful not to 
proceed with undue haste. Beginning with those branches of indus- 
try, in which no great experience or intelligence was required, it 
would have to proceed step by step in extending the sphere of its 
operations, and would have to be content if, at the end of sixty or 
a hundred years, it had succeeded in bringing the whole of produc- 
tion within that sphere. From this, however, it follows that the 

'"Adapted from Principles of Economics, II, 88-91. Copyright by Mac- 
millan & Co. (1902). 



PROJECTS OF SOCIAL REFORM 771 

transfer would necessarily have to^ be effected on terms of adequate 
compensation to the present owners. We are now leaving questions 
of equity entirely out of consideration, and regarding only the eco- 
nomic aspects of the question. During the time when the State was 
engaged in appropriating the instruments of production, there 
should be no disturbances of a nature to occasion direct distress, 
and such disturbances would be inevitable where sentence of con- 
fiscation was hanging like a sword of Damocles over the head of 
every capitalist for a number of years. The more it became evi- 
dent from experience that the danger was real and no mere bogey, 
the worse would things grow. People would become much less in- 
clined to save, and much more disposed to squander. The proper- 
ties which the State was to take over would ultimately have got into 
the most melancholy condition of decay, and habits of neglect and 
recklessness would have become general and would be slow to dis- 
appear. 

A State, which meant to become socialist, would have to do one 
of two things: if it offered no full compensation, it would have to 
take over the whole production in a very short period of time; if, 
on the other hand, it meant to take over the various branches of 
production by degrees, it would be unable to escape the necessity 
of offering compensation. The former alternative would be impos- 
sible, even in such a small country as Holland. The second alterna- 
tive would, therefore, have to be chosen on purely economic grounds, 
apart from all considerations of justice. And the compensation 
would have tO' be such as would be deemed sufficient by the recip- 
ients themselves, otherwise it would fail in its object. It has been 
suggested that the compensation might be paid in thirty or fifty 
annuities. Certainly this system, like many another, could be ap- 
plied ; but we must clearly understand that everything which re- 
duced the compensation would diminish the care given to such 
goods as the State had not yet appropriated. And it would be of 
the utmost importance that this care should not be relaxed, but 
should continue unabated up to the very end. 

It would of course be possible to create a certain inducement for 
the owner not to neglect his property, by providing that the number 
or the amount of the annual payments made by way of compensa- 
tion should depend upon the state of the property at the time of its 
transfer to the Government ; it is verj^ much to be questioned, how- 
ever, whether this would prove a sufficient inducement. Every one 
would compare the actual advantage that accrued from saving the 
expense of upkeep with the possible disadvantages of the annual 



772 CURRENT ECONOMIC PROBLEMS 

payment system,, and it is easy to judge what the result of the com- 
parison would be in most cases ; more especially if the payments 
took a form which did not commend itself to the owner, or if there 
were any reason tO' suppose that the socialist State might not fulfill 
its obligations. 

We look further into the future; sixty, or, say, a hundred years 
have passed; what condition of things do we see now? What has 
changed and what has not? 

The principal survival is the inequality, the very thing that some 
people found most difficulty in submitting to in the past. There are 
no longer any merchants, shipowners, or manufacturers, there are 
no landowners or bankers; but, unless the annuity system of com- 
pensation has been adopted, we find, instead, a very large number 
of holders of Government stock, so that there are as many owners 
of property as before. This class will remain and increase. For 
the socialistic State will have recognised — if not at once, then after 
being taught by bitter experience — that with growth of population, 
capital also must grow, and that it must grow even more rapidly 
than the population. The State will therefore have to encourage 
thrift by paying a certain rate of interest on all savings entrusted 
to its keeping. It will have to maintain the law of inheritance; for 
there can be no^ strong incentive to save, unless goods for consumpi- 
tion and claims in respect of debt can be handed down from one 
generation to another. We do not know if this is quite compatible 
with the socialistic system, but we do' know that it is absolutely 
necessary, since the need for capital will always remain, no matter 
on what lines society may be organized. 

The inequality thus remains; only certain of its causes disap- 
pear. Fortunes can no' longer be accumulated in commerce or in- 
dustry, nor does increased demand for agricultural or building land 
tend any longer to enrich the few at the expense of the many. But 
gambling on the Stock Exchange will not have disappeared. Even 
though the compensation should have taken the form of terminable 
annuities, it would be many years before all the bonds establishing 
their holders' claims to such annuities had disappeared, and it is 
probable that in a socialistic State these bonds would be subject to 
considerable fluctuations in the market. Even if all the annuities in 
the country itself were to have expired, there would still, nO' doubt, 
be bonds of other countries to speculate in. Besides, there will 
never be wanting things to serve as the subject of betting and gam- 
bling transactions. If any one expects that the socialistic State will 
be able to get rid of these causes of inequality, his optimism must 
be rather extravagant. 



PROJECTS OF SOCIAL REFORM 773 

374. Some Objections to Socialism^^ 

BY WILLIAM GRAHAM 

To the general scheme of socialism it is easy to see m.any ob- 
jections. The first is that nothing could be produced either in the 
sphere of material or intellectual production that was not pleasing 
to the chiefs or the heads of the departments of production. At 
present it is demand which determines what shall be produced, and 
every conceivable demand is catered to. Under collectivism produc- 
tion will determine demoand ; at least demand will have to accom- 
modate itself to production. The state would practically control the 
production of immaterial things. It could print or suppress what 
books it pleased, because it wouild control all the printing presses 
and pay all the printers. 

The next objection refers to the quantity and quality of the pro- 
duction. It is urged that the great stimulus to the private interests 
of the industrial chief being withdrawn, he will take little interest 
in the result. The workers will be disposed to take things easy, 
work in itself not being pleasant, and no one fearing dismissal 
under a socialist regime. Were the chiefs restricted to shares equal 
with the laborers, no economic incentive would be furnished them 
to make the output of their departments as much and as good as 
possible. In a word, impracticality may be written large over the 
collectivist scheme so far as it would largely cut down the salaries 
oif superiors, discourage inventors, or arbitrarily dictate production. 

A common objection to socialism is that under it the supply 
of capital to create or to prevent the deterioration of instruments of' 
production would be insufficient, from the withdrawal of the pres- 
ent potent stimulus to saving in the shape of interest. Under Col- 
lectivism the new capital would take the form of a tax or a deduc- 
tion from gross product. Abstinence, necessary to the accumulation 
of capital would not be paid for by the receipt of interest by the 
individual. There is reason for thinking that he therefore would 
refuse tO' sanction the tax which made his abstinence necessary. 

But the commonest of all the objections to socialism is that lib- 
erty would be in danger ; liberty, which, as Mill says, is next to food 
and drink, the most craving want. It is objected that the State 
being sole producer, the leaders and directors of industry might be 
despotic. The power of buying the things we pleased would be 

^^Adapted from Socialism New and Old, 162-182 (iSgi). This selection 
merely enumerates the objections to socialism; it makes no critical estimate of 
their validity. For the author's estimate see the reference. 



774 CURRENT ECONOMIC PROBLEMS 

narrowed, and liberty of thought and speech there could not be if 
the State were the sole owner of the printing presses. 

Mill's main objection to socialism, however, is that under it 
there would be no asylum left for individuality of character. He 
fears that public opinion would be a tyrannical yoke ; and doubts 
"whether the absolute dependence of each on all and surveillance 
of each by all would not grind all down into a tame uniformity of 
thoughts, feelings, and actions." We should thus, all, cast in mo- 
notonous moulds, become as like as sheep in a flock. The "general 
average" would become utterly weary, flat, and unprofitable. 

Doubts have been frequently expressed whether culture would 
not be in danger under Socialism. Would the mass of the people 
in a democratic society, appreciate a thing they had not got, and 
did not know? Would they recognize the necessity of setting aside 
funds for its support and encouragement? Sidgwick says, "It is 
only in a society of comparatively rich and leisured persons that 
these capacities for culture are likely to be developed and trans- 
mitted in any high degree." 

375. Socialism and the Factors of Production 

In fervid attempts to correct the inequalities in distribution, we 
are very likely to overlook the social importance of production. Only 
what is produced can be distributed; consequently the larger the 
production, the greater the average distributive share. Therefore, 
before a scheme of social reform can win our approval, it must show 
either that it will not decrease production, or that the decrease will 
be more than balanced by gains in the distributive system. Produc- 
tion must not be overlooked. 

The amount of the "social dividend" is contingent, among other 
things, upon the proportion maintained between the factors of pro- 
duction. The greatest steps in material progress have been associated 
with a decrease in the amount of labor used in proportion to the 
non-human elements in production. The economic importance of 
the Black Death lies in its decrease of the population ; of the settle- 
ment of America, in its increase of natural resources ; and of the 
Industrial Revolution in its increase of accumulated capital. In the 
"socialistic future" the state will find itself in the "stage of dimin- 
ishing returns" ; for the cry for socialism will remain an unheeded 
wail so long as "increasing returns" yield abundance. Relief from 
the pressure of population on resources cannot be found in the 
utilization of new lands, for no new continent will be left for ex- 
ploitation. As a result the maintenance of a high standard of living 
can be achieved only, either by a strict limitation of numbers, or by 



PROJECTS OF SOCIAL REFORM 775 

an increase in capital. It is necessary, therefore, to inquire what 
influence sociahsm is Hkely to have upon the increase or decrease of 
these factors of production. 

To be quite fair, let us assume that socialism, once achieved, 
will realize the dreams of its advocates : that it will substantially 
reduce the inequalities in the ownership of wealth, and materially 
increase the incomes of the classes at the bottom. Granted a tem- 
porary increase, the important question is whether these incomes can 
remain permanent. We have no reason for thinking that socialism 
will make us creatures of different passions, and that in this ideal 
state maids. will cease to look fair to youths. The larger income will 
make marriage possible to many who cannot now "afford it." For 
others marriage will be possible at earlier ages. The result will be 
an increase in the birth rate. Likewise the larger incomes and the 
temporarily better way of living should mean for a time a decrease 
in the rate of infant mortality. Both causes would tend to increase 
the number of laborers in the next generation, to lower the margin 
of industry, and to establish lower rates of wages, and lower stan- 
dards of living. There is no 'reason why this tendency should not 
be continued until wages and standards were as low as — or lower 
than — under the older system. The conditions of the "workers" 
would, therefore, be improved only during the transition period 
during which the "surplus" wealth of the "classes" was being trans- 
ferred. In the end the lower classes would be no better off. The 
only appreciable gain would be in a larger number of souls to be 
saved. 

But what about the increase of capital? Under our present 
system thrift is voluntary, not compulsory. Society relies for its 
capital upon the temptation to accumulation offered by private prop- 
erty and by inheritance and the opportunity for saving residing in 
the unequal distribution of income which showers upon the privil- 
eged few more than they can spend and forces large aggregates of 
wealth to be reinvested in the productive process. A stratifying 
society presents ideal conditions for the accumulation of capital. 
Democratic equality and rigid class distinction are alike inimical to 
the rapid piling up of productive wealth. However, if individual 
thrift proves inefffcient, the socialist state is in position to substitute 
compulsory thrift. Let us see what use a socialistic society can make 
of each of these methods. 

Voluntary thrift would not suffice. If no interest were offered 
on savings, and moral encouragement alone was used, the tangible 
wealth accumulated would be negligible. If interest were offered, 



776 CURRENT ECONOMIC PROBLEMS 

either by a payment on bank deposits or by the sale of interest- 
bearing bonds, some capital would be formed. But if inheritance 
were not allowed, the disposition to spend would increase with ad- 
vancing years, and a rather high rate of interest would be necessary 
to secure adequate results. If inheritance were allowed, the system 
would be very similar to our own. In fact these methods involve 
making use of the individualistic incentives to thrift. But, without 
raising this question, the chief incentives to individual accumulation 
would be absent. The large fortunes, which are the basis of so much 
current accumulation, would be no longer present. Again, the em- 
phasis which a socialistic state would place upon life in the present, 
together with the greater equality in station and possessions, would 
cause expenditure closely to approach income. 

Yet, even if individual thrift were inadequate, it must be ad- 
mitted that the state could compel accumulation. Under a money 
economy, it could accomplish this, either by placing a tax upon the 
income of its citizens with the object of paying for the production 
of capital goods, or by raising the prices of consumptive goods and 
using the surplus in the same way. Without a money economy, the 
same object could be effected by a simple distribution of men between 
occupations turning out "present" and "future" goods. An analogy 
is found in the distribution of work in military societies, where a 
part of the labor force is sent out to fight and a part is kept at home 
to supply the fighters with munitions and provisions. But could 
the state enforce accumulation? Suffrage would be democratic. 
Democracy is a short-sighted and wasteful institution that is too 
much of a luxury for any country save one with large and virgin 
resources. Under our system little attention is given to the necessity 
of conserving the supply of capital. Recall, if you can, a considera- 
tion of this question in a political speech. Socialists show little 
appreciation of the role of capital in production. They fail to appre- 
ciate the importance of keeping up its supply. It seems extremely 
doubtful whether a party committed to an increase of capital, at- 
tended as such an increase necessarily is by a sacrifice in immediate 
consumption, could survive in a socialistic state. The opposing party, 
promising immediate prosperity and higher incomes — of course at 
the expense of the future — would be almost certain to enjoy popular 
support. Socialism, therefore, still further threatens to lower the 
margin of industry, wages, and the standard of living, by failure to 
induce a sufficient supply of capital. 

It must not be denied that these difficulties are not insuperable. 
The lower classes may, in course of time, learn to control their 
numbers. The electorate may learn that individual and immediate 



\ PROJECTS OF SOCIAL REFORM 777 

gain must often be sacrificed if more ultimate social good is to be 
achieved. It m.ay even learn the importance of keeping up the 
supply of capital. But as yet these lessons have not been learned. 
And when society attains this measure of wisdom, the problem of the 
"classes at the bottom" will have lost much of its importance. The 
severity of their distress will have disappeared. The magic of 
socialism will be no longer necessary. In short, socialism is too 
individualistic and too short-sighted to meet our needs. 

H. SOCIAL PANACEAS 

376. Stable Money and the Future"^ 

BY GEORGi; H. SHIBIvEY 

With a return to the more stable bimetallic standard of prices 
and with the principle established that "stability in the measure of 
prices (exchange value) is the desideratum," the people of the 
United States will insist that the measure be kept practically un- 
fluctuating through the government controlling the volume of paper 
money, this wili. make; stable the measure oe prices through- 
out THE SPECIE-USING COUNTRIES. In a short time, then, the prin- 
ciple will become deeply rooted in the ethics of all the advanced 
peoples that stability in the measure of prices is just — right. Then 
shall we have such co-operation among nations as will keep specie 
in the money of the several countries, and by so doing keep an 
equilibrium in the export and import prices of these countries 
through using the specie in paying balances in trade. 

With a stable measure of prices there will be added "a wholly 
new degree of stability to social relations." This is equivalent to 
saying that with general prices stable there will be steady employ- 
ment and the consequent good times and the dropping away of nearly 
all the tariff wars, then will the disarming of Europe speedily 

COME ABOUT AND THE ARBITRATION OE ALL EUTURE DIFFERENCES BE 
AGREED UPON BY THE LEADING NATIONS. AND WHEN THIS OCCURS 
THE LESSER NATIONS WILL BE COMPELLED TO SUBMIT THEIR DISPUTES 
TO ARBITRATION. 

This is not visionary. It is the direction toward which past 
events point. Are we to progress? Reader, you are one of the fac- 
tors. Is it in you to help along the car of progress ? 

^^Adapted from "The 50 Per Cent Fall in General Prices, the Evil Effects, 
the Remedy," "Bimetallism at 16 to i, and Governm,ental Control of Paper 
Money, in Order to Secure a Stable Measure of Prices," in Stable Money: 
Monetary History, 1850-1896, 722-723. Copyright by the Stable Money Pub- 
lishing Co. (1896). 



778 CURRENT ECONOMIC PROBLEMS 

377. The Way Out^^ 

BY JOHN RAYMOND CUMMINGS 

In the following pages I undertake to prove these propositions : 

That there is a natural money. 

That its adoption will make panics impossible. 

That after a term of years natural money will bring our bank- 
ing system to such condition that every bank will be able to pay all 
its obligations instantly. Banks will then be the accountants, cus- 
todians, and clearing-houses for all the people. 

That in the course of time (probably within fifty years) natural 
money will put all business on a cash basis. 

That in a like period the interest rate for property loans will fall 
to I or 2 per cent, and probably will disappear from money loans. 

Natural money will enable the government to take over all the 
land and all the privately owned public utilities on terms very liberal 
to present owners, without issuing a bond and without hardship and 
injustice. 

It will enable the government to build during the same period a 
million miles of highway at a cost of $10,000 the mile. 

To irrigate and drain a large proportion of the area needing irri- 
gation and drainage. 

To develop tens of millions of horse power from water and 
distribute it throughout the country. 

To develop internal waterways on a scale hitherto unattempted 
and undreamed of. 

It will raise wages and end strikes and lockouts. 

It will establish natural wages and secure equity as between em- 
ployers and employees. 

It will pay off the government debt and make future debt im- 
possible. 

It will end our present industrial warfare and bring now dis- 
cordant classes into harmonious co-operation, inaugurating an era 
of progress and prosperity such as the world has not even conceived 
of. 

378, Universal Federation^* 

BY KING c. gille;tte; 

"World Corporation" will result in a new civilization, new in 
every part of its structure of mind and matter. The whole aspect 

^''Adapted from Natural Money: The Peaceful Solution, S-^. Copyright 
by the Bankers Publishing Co. (1912). See also the author's Social Autonomy: 
The New Economic Dispensation. 

^^Adapted from World Corporation, 216-219. Copyright by the author 
(1910). 



\ PROJECTS OF SOCIAL REFORM 779 

of nature will assume new meanings and ends, for it will be seen 
by new senses of interpretation. With our present individual knowl- 
edge, we cannot conceive it; or, if we could, we would not believe 
it possible. 

Who is there wise enough to predict what will result after 
"World Corporation" has been launched, after the people realize 
what its success will mean, what the outcome will be? Who can 
foresee to what degree of enthusiasm the people will rise in their 
desire and hope for emancipation ! Man is emotional, and quickly 
carried forward upon waves of popular excitement; and it is 
these great tidal waves of emotion that mark the revolutionary 
changes throughout history. The gradual growth of a thought, an 
idea which has within it a germ of human progress, finds its cul- 
mination in emotion, and change is brought about quickly and de- 
cisively. 

The thought that humanity is on the borderland of a new sys- 
tem, a new epoch-making period of the world's history, is spreading 
from mind to mind, and rapidly changing preconceived ideas of life 
and man's relation to man and to nature. The fever of excitement is 
already beginning to course through the veins, and only waits on con- 
viction to burst into flame. 

The elimination of competition by the centralization of industry 
into Corporations and Trusts, and its resulting economies, has set 
the individual to thinking. He begins to doubt his old belief that 
competition is necessary to progress ; he asks himself questions and 
seeks the answers in his own mind, and, when these answers are 
not forthcoming, he asks others. Discussions are heard on every 
hand in regard to corporations and trusts, and newspapers and maga- 
zines are largely devoted to this same subject. All are asking: 
What is the outcome of this evolution that is taking place? What 
is a Corporation? What is a Trust? Are they not miniature cor- 
porate governments of capital and individuals? And gradually 
the thought begins to dawn — the thought which is going to rise to a" 
culminating point within the next few years, and carry men off their 
feet ; which will crowd out every selfish idea — the thought that 

THE EMANCIPATION OF THE HUMAN RACE IS IN OUR HANDS. By a 

single stroke humanity can change a system of extravagance, dis- 
order, injustice, and crime into one of order, equity, and virtue. 
Nothing stands in the way; for where is there any difference be- 
tween the control of a part of industry by a few individuals and the 
control of all industry by all? This is the thought that will be acted 
upon; this is the thought that will make men forget self and pour 
their minds and wealth with equal prodigality into the treasury of 
'.'World Corporation." 



78o CURRENT ECONOMIC PROBLEMS 

Enthusiasm is the foundation of power which centralizes force 
and destroys every barrier between itself and its purpose. It makes 
an army out of scattered parts. It leads to "World Corporation." 

379. A New Earth^^ 

BY h. G. CHIOZZA MONEY 

It would be a great pity if anyone were to imagine that the 
changes necessary to secure the just reward of all forms of labor 
are either difficult to effect or likely to cause dislocation in the mak- 
ing. The greater number of our industrial concerns are already 
shaped in the form of limited liability companies, the shareholders in 
which are dumb, while the management is in the hands of paid offi- 
cials. The reform which needs to be effected is to substitute the 
community at large for the dumb shareholders. Management, abil- 
ity, invention, would be properly rewarded, as they are now re- 
warded in some cases, and as they are not now rewarded in many 
cases. The only change would be the gradual substitution of the 
community for the shareholders, and the consequent disappearance 
of unearned incomes. Such portions of the product as were neces- 
sary for application as new capital would be so applied by the com- 
munity. For the rest, the whole of the product would go to labor. 
Saving, the necessary saving, without which labor would go with- 
out tools, would be simply and automatically effected, and capital 
would take its true and rightful place as the handmaiden of labor. 

Let us not go farther without a vision and a hope. That vision, 
that hope, is not of a regimented society, but of a community re- 
lieved from nine-tenths of its present irksome routine and carking 
care. If the individual is to be set free it can only be in a society 
so organized as to reduce the labor employed in the production of 
common necessities to a minimum. The minimum cannot be secured 
without the organization of each of the great branches of produc- 
tion and distribution. Common needs can be satisfied with little 
labor if labor be properly applied. The work of a few will feed a 
hundred or supply exquisite cloth for the clothing of fifty. The 
work for a few hours per day of every adult member of the com- 
munity will be ample to supply every comfort in each season to 
all. Thus set free, the lives of men will turn to the uplifting, indi- 
vidual work which is the pride of every craftsman. The dwellings 
of men will contain not only the socialized products within common 
reach, but the proud individual achievements of their inmates. The 

^^ Adapted from Riches and Poverty, 324-329. Published by Methuen & 
Co. (1905). 



PROJECTS OF SOCIAL REFORM 781 

simple and beautiful clothing of the community will chiefly be made 
of fabrics woven in the socialized factories, but it will often be 
worked by the loving hands of women. A happy union of labor 
economized in routine work and labor lavished upon individual work 
will uplift the crafts of the future and the character of those who 
follow them. The abominations of machine-made ornament will dis- 
appear, and art be wedded to everyday life. Each new invention to 
save labor in mining, or tilling, or building, or spinning, vv^ill be hailed 
with joy as a release from toil and a gift of more time in which to do 
individual work. 

The inventor, the originator, now • unhappily compelled to hunt 
for a capitalist and bow low his genius before some individual dis- 
tinguished only for that gift of acquisitiveness, that business ability, 
which is the lowest attribute of mankind, will see his idea put to the 
test and reap not unholy gains but the honor of his fellows if it is 
not found wanting. The painter, no longer compelled to paint por- 
traits of the rich and not necessarily beautiful, will ally his gifts 
with the common life of men and be carried in triumph before the 
enduring monuments of his genius. The organizer, the man of ar- 
rangement, will be invited to exercise his talent, not in overreaching 
and despoiling his fellows, but in planning their welfare in a thou- 
sand new schemes of development. 

No host of wasteful workers will be found in the industrial 
camp. Accounts will be simple and clerks few. No travelers, 
agents, or touts will be needed to push doubtful commodities. The 
sham and the substitute will be found only in museums. It will be 
obviously ridiculous to employ any but good materials, for labor 
can only be economized by producing the things which are the best 
of their kind. Policies of insurance, those typical documents of a 
community of prey, will be read in the public archives with much the 
same feeling as we now read a warrant for the burning of a Bruno. 
The young men who now waste their time in ruling up books in 
banks and insurance ofifices or in serving writs will find manly and 
useful work. The production of commodities will be commensurate 
with the labor put forth, unemployment will be one of the few 
crimes known to the statute-book, and last, but not least, the eco- 
nomic dependence of woman will cease. 

The attainment of such ends will only be difficult as long as we 
refuse to apply scientific methods to the ordering of common af- 
fairs. It is in the domain of politics alone that men refuse to apply 
first principles to the solution of problems. The mental daring 
which has accomplished so much in engineering, in astronomy, in 



782 CURRENT ECONOMIC PROBLEMS 

surgery, in every department of science, is replaced in the sphere of 
politics by a timorous tinkering with admitted evils. With things 
the scientist has worked marvels in a single century. With those 
marvels the politician has done little. The scientist has applied his 
skill to locomotion; the politician has refused to avail himself of 
that skill in order to distribute the population healthily. The scien- 
tist has stated the conditions of health ; the politician has refused 
to create those conditions. The scientist has supplied the tools ; the 
politician has neglected to take them up. 

The problem of riches and poverty is of the simplest. It pre- 
sents none of the difficulties which attach to the measurement of 
the mass of the sun, or the treatment of such a disease as cancer. 
Science has presented us with such instruments that we can easily 
create a tremendous superfluity of commodities if we choose to do 
so. We know how to produce; we know how to transport the re- 
sults of our production. The appliances at our command could fur- 
nish many more foot-tons of work than are needed to give proper 
housing, suitable clothing and good food to every unit of the com- 
munity. There is here no impenetrable secret ; we have read enough 
in the book of Nature to control her forces to effect; our power 
of production is not too small, but already greater than our need. 
If invention went no farther, if science now came to a standstill, 
we should have tools more than adequate to abolish poverty. 

Unfortunately the politicians and the economists have never dis- 
cussed the question of poverty from this point of view. Volumes 
have been written on such subjects as "rent," "interest," or "value," 
but nothing has been done to enquire how much work is needed to 
feed, clothe and house a community, and how best that work may be 
accomplished. In designing an engine, the man of science considers 
the work to be done and the known means to do it. For want of 
that agreement and determination, for want, that is, of a wise col- 
lectivism, the greater number of our people are poor. It is a world 
of service which a civilization would substitute for a world of serf- 
dom and pain. But if, realizing that the world has no room for 
the idle, the people would rise to a freedom only bounded by the 
knowledge of and necessity for collective decision, then there is the 
broadest avenue for hope and the clearest call to action. The 
achievements of those who are gone, these are the inheritance of the 
people. The only true riches of the nation, men and women, these 
are the people themselves. The people have but to will it, and we 
set our faces toward a civilization. 



• PROJECTS OF SOCIAL REFORM 783 

I. ECONOMICS AND THE FUTURE OF SOCIETY 
380. Wanted: A New Symbolism^^ 

BY AI.VIN S. JOHNSON 

The aristocracies have vanished, we shall never know them 
again. The work of supplying the world, now and for the future, 
has become one of such complexity, requiring so broad a diffusion 
of general intelligence, that merely personal dignitaries can never 
again acquire their ancient influence over man's mind, their ancient 
hold on his conduct. There remains in the world only the common 
man. Differences in natural endowment, in culture and in wealth 
persist ; but these can not alter the fact of a fundamental democracy. 
So far as we serve, we serve the common man. 

But — and this we must fix in our minds — the comimon man of 
today is not the obscure citizen of earlier epochs. The same com- 
mercial process which has broken down the earlier class organiza- 
tion has produced a differentiation in economic structure, an interde- 
pendence of parts, which compels us to conceive of economic society 
as a living organism. The common man of today compares with 
his prototype of yesterday as the cell in an organized tissue com- 
pares with the cell in the half-coherent mass of protoplasm. The 
functions of the individual are now organic functions, far trans- 
cending the narrow confines of his own personality. The pilot, the 
engineer, the steel worker, the coal-heaver, are significant, not in 
themselves, but in the social work they perform. With the progress 
of time, a constantly increasing share of the population assumes 
functions essentially social. 

In serving the common man, then, we are performing a work 
far more worth while than that of supplying the needs of an indi- 
vidual, of whatever personal worth. We are serving a social func- 
tionary in the last analysis, society itself. Our work, then, is sig- 
nificant or meaningless according as we conceive society itself as 
worthy or not. If we are constrained to think of our society as ninety 
million persons, chiefly knaves and fools, the service will be irksome, 
to be shirked, if possible. If the society we serve is full of brutality 
and injustice, disfigured with poverty and ignorance, corrupted with 
cynicism and self-indulgence, it can not inspire us with loyalty in 
its service. The exhausting toil of the long day, the hopeless mis- 
ery of the sweatshop, the sordid depravity of he slumi, can not much 
longer cumber the earth if society is to command the best efforts 

^'Adapted from "An Ethical Aspect of the New Industrialism," in the 
South Atlantic Quarterly, XII, 9-1 1. Copyright {igi2). 



784 CURRENT ECONOMIC PROBLEMS 

of its servitors. We are not now concerned with the question of 
justice to those who live and toil in wretchedness. That question 
is worth considering in its proper place; it is sufficient here to indi- 
cate that, for the orderly progress of industry in the coming era, we 
must remove conditions that destroy our faith in society. Men in 
the service of society will give their best efforts only if society, is 
worth serving. 

But it is not sufficient that society should be worth serving, the 
worth of society and the worth of work in its service must be given 
concrete expression if these values are to mold men's conduct. To- 
day these values are perceived, but dimly ; they exercise an influence 
in limited fields. Men in the service of the railways, as a rule, en- 
deavor honestly to realize the ideal of continuous and adequate ser- 
vice. Coal miners are loth to strike at the opening of winter. Their 
social function plays a part — though unfortunately a minor part — 
in controlling their economic policy. As a rule, however, the ser- 
vants of society, employers and employees alike regard any peculiar 
dependence of society upon their services as an element strengthen- 
ing their bargaining position, a peculiar opportunity for gain. The 
wheat is falling froril the head; the fruit is rotting on the tree; an 
excellent time for a concerted demand for higher wages ! An in- 
dustrial city has been built upon the expectation of the continuous 
supply of material : what an opportunity for the material producers 
to levy tribute! A whole nation lives from day to day upon the 
fruits of its mechanical industries ; coal is its bread. A dazzling 
prospect of gain lies before those who' can possess themselves of 
the mastery of the mines. Responsibility of function is opportunity 
for gain; so prevalent is this conception that when we assert that 
the use of responsibility for gain, not for service, is a species of 
treason, we seem to be harking back to the middle ages. And so 
we are. But there is much in the mediaeval industrial spirit that is 
eternal: much that must be restored to our society after the dis- 
orders of an era of expansion and exploitation. 

The worth of society and of work in its service — these are 
the social values that must govern in the new industrialism. As 
mere abstract ideas they can have no potency. As abstract ideas 
the kings and nobles of an earlier age had no potency; they were 
invested with the power of social values by the work of architects 
and sculptors, poets and philosophers. The poets, as it were, cre- 
ated kings and knights — ideals toward which actual rulers and no- 
bles sought to elevate themselves. Architects and sculptors, paint- 
ers and poets, can transform social man and society into values 
capable of dominating industry. The task may be difficult; but it 



PROJECTS OF SOCIAL REFORM 785 

is no more difficult than that of vesting glory in the House of 
Atreus or the House of Bourbon. 

The ultimate need of the new industrialism, then, is not more 
trained skill, more applied science — although these two are good 
things in their way — 'but artists and poets who shall translate so-r 
ciety and social man into^ terms of values worth serving. When 
these have done their work we shall hear less of the deterioration of 
labor and the abuse of responsibility, of industrial decay and social 
corruption, of irreconcilable conflict and threatened revolution. A 
revolution will have been accomplished: a revolution in ideals and 
in values. 

381. The Banquet of Life" 

BY WILLIAM GRAHAM SUMNER 

In 1886 a society published a set of analytical topics covering 
the field of social science. Among the topics which the student is 
invited to discuss is this : "The Banquet of Life, a Collation or an 
Exclusive Feast." The antithesis which is intended is undoubtedly 
that between a supply for all and a supply for a limited number. 
If there is any banquet of life, the question certainly is, whether it 
is set for an unlimited or for a limited number. 

If there is a banquet of life, and if it is set for an unlimited num- 
ber, there is no social science possible or necessary; there would 
then be no limiting conditions on life, and consequently no problem 
of how to conquer the difficulties of living. There would be no com- 
petition, no property, no monopoly, no inequality. Fresh air and 
sunlight are provided gratuitously and superabundantly, not abso- 
lutely, but more nearly than any other material goods, and therefore 
we see that only in very exceptional circumstances, due to man's 
action, do these things become property. If food were provided in 
the same way, or if land, as a means of getting food, were provided 
in the same way, there would be no social question, no classes, no 
property, no monopoly, no difference between industrial virtues and 
industrial vices, and no inequality. When, therefore, it is argued 
that there is, or was, or ought to be, a banquet of life, open to all, 
and that the fact that there is no such thing now proves that some 
few must have monopohzed it, it is plain that the whole notion is 
at war with facts, and that its parts are at war with each other. 

The notion that there is such a thing as a boon of nature, or a 
banquet of life, shows that social science is still in the stage that 

^■^Adapted from "The Banquet of Life," reprinted in Earth-Hunger and 
Other Essays, 217-221, from the Independent, XXXIX, ^yz- Copyright by the 
Independent and Yale University Press (1887). 



786 CURRENT ECONOMIC PROBLEMS 

chemistry was in when people believed in a philosopher's stone; 
or medicine, when they believed in a panacea ; or physiology, when 
they believed in a fountain of youth, or an elixir of life. Many of 
the phenomena of the present seem to indicate that this group of 
facts is just coming under the dominion of science. The discord 
and confusion which we perceive are natural under the circum- 
stances. Men never cling to their dreams with such tenacity as at 
the moment when they are losing faith in them, and know it, but 
do not yet dare to confess it to themselves. 

If there was such a thing as a banquet of life, open to all com- 
ers, to which each person was entitled to have access just because 
he was born, and if this right could be enforced against the giver 
of the banquet, that is, against nature, then we should have exactly 
what we want to make this earth an ideal place of residence. We 
should have, first of all, a satisfaction which cost no effort, which 
is the first desideratum of human happiness, and which we have not 
hitherto ever seen realized at all except in the narrow domain of 
luck. Secondly, we should have abstract justice in nature, which 
we have never had yet, for luck is of all things the most unjust. We 
should also have equality, which hitherto we have never found in 
nature. Finally, we should have a natural right which could be de- 
fined and enforced, not against men, but against nature — the trouble 
with natural rights hitherto has been that they could not be defined, 
that nature alone could guarantee them, and that against nature they 
could not be enforced. 

If we take the other alternative and conceive of the banquet of 
life as a limited feast, then we see at once that monopoly is in the 
order of nature. The question of weal or woe for mankind is : what 
are the conditions of admission? How many are provided for? 
Can we, by any means open to us, increase the supply ? But when 
we take the question in this form we see that we are just where we 
and our fathers always have been ; we are forced to do the best we 
can under limited conditions, and the banquet of life is nothing but 
a silly piece of rhetoric which obscures the correctness of our con- 
ception of our situation. 

When men reasoned on social phenomena by guessing how 
things must have been in primitive society, it was easy for them to 
conceive of a "state of nature" or a "golden age" ; but, as we come 
to learn the facts about the primitive condition of man on earth we 
find that he not only found no banquet awaiting him here, and no 
natural rights adjusted to suit him, but that he found the table of 
Nature already occupied by a very hungry and persistent crowd 
of other animals. The whole table was already occupied — there 



PROJECTS OF SOCIAL REFORM 787 

was not room for any men until they conquered it. It is easy for 
anyone now to assure himself that this is the true and only correct 
notion to hold on that matter. If land ever was a boon of Nature 
to anybody it was given away to the plants and animals long before 
man appeared here. When man appeared, he simply found a great 
task awaiting him : the plants and animals might be made to serve 
him, if he could conquer them; the earth would be his if he could 
drive off his competitors. He had no charter against Nature, and 
no rights against her ; every hope in his situation had an "if" in it — 
if he could win it. 

We look in vain for any physical or metaphysical endowment 
with which men started the life of the race on earth. We look in 
vain for any facts to sustain the notion of a state of primitive sim- 
plicity and blessedness, or natural rights, or a boon of material 
goods. All the facts open to us show that man has won on earth 
everything which he has here by toil, sacrifice, and blood; all the 
civilization which we possess has been wrought out by work and 
pain. All the rights, freedom, and social power which we have in- 
herited are products of history. Our institutions are so much a mat- 
ter of course to us that it is only by academic training that we 
learn what they have cost antecedent generations. If serious knowl- 
edge on this subject were more widespread, probably we should have 
a higher appreciation of the value of our inheritance, and we should 
have less flippant discussion of the question : What is all this worth ? 
We should also probably better understand the conditions of suc- 
cessful growth or reform, and have less toleration for schemes of 
social reconstruction. 

Civilization has been of slow and painful growth. Its history 
has been marked by many obstructions, reactions, and false develop- 
ments. Whole centuries and generations have lost their chances on 
earth, passing through human existence, keeping up the continuity 
of the race, but, for their own part, missing all share in the civiliza- 
tion which had been previously attained, and which ought to have 
descended to them. It is easy to bring about such epochs of social 
disease and decline by human passion, folly, blunders, and crime. 
It is not easy to maintain the advance of civilization; it even seems 
as if a new danger to it had arisen in our day. Formerly men lived 
along instinctively, under social conditions and customs, and social 
developments wrought themselves out by a sort of natural process. 
Now we deliberate and reflect. Naturally we propose to interfere 
and manage according to the product of our reflection. It looks as 
if there might be danger soon lest we should vote away civilization 
by a plebiscite, in an effort to throw open to everybody this imagin- 
ary "Banquet of Life." 



788 CURRENT ECONOMIC PROBLEMS 

382. Progress and Discontents^ 

BY THOMAS BABINGTON MACAULAY 

It may at first sight seem strange that society, while constantly 
moving forward with eager speed, should be constantly looking 
backward with tender regret. But these two propensities, incon- 
sistent as they may appear, can easily be resolved into the same 
principle. Both spring from our impatience of the state in which 
we actually are. That impatience, while it stimulates us to surpass 
preceding generations, disposes us to overrate their happiness. It 
is, in some sense, unreasonable and ungrateful in us to be constantly 
discontented with a condition which is constantly improving. But, 
in truth, there is constant improvement precisely because there is 
constant discontent. If we were perfectly satisfied with the present, 
we should cease to contrive, to labor, and to save with a view to the 
future. And it is natural that, being dissatisfied with the present, 
we should form a too favorable estimate of the past. 

In truth, we are under a deception similar to that which misleads 
the traveler in the Arabian desert. Beneath the caravan all is dry 
and bare ; but far in advance, and far in the rear, is the semblance 
of refreshing waters. The pilgrims hasten forward and find noth- 
ing but sand an hour before they had seen a lake. They turn their 
eyes and see a lake where, an hour before, they were toiling through 
sand. A similar illusion seems to haunt nations through every stage 
of the long progress from poverty and barbarism to the highest de- 
grees of opulence and civilization. But, if we resolutely chase the 
mirage backward, we shall find it recede before us into the regions 
of fabulous antiquity. It is now the fashion to place the Golden 
Age of England in times when noblemen were destitute of com- 
forts the want of which would be intolerable to a modern footman, 
when farmers and shopkeepers breakfasted on loaves, the very sight 
of which would raise a riot in a modern workhouse, when to have 
a clean shirt once a week was a privilege reserved for the higher 
class of gentry, when men died faster in the purest country air than 
they now die in the most pestilential lanes of our towns, and when 
men died faster in the lanes of our towns than they now die on the 
coast of Guiana. We, too, shall, in our turn, be outstripped, and in 
our turn be envied. It may well be, in the twentieth century, that 
the peasant of Dorsetshire may think himself miserably paid with 
twenty shillings a week ; that the carpenter at Greenwich may re- 
ceive ten shillings a day; that laboring men may be as little used 
to dining without meat as they now are to eat rye bread ; that sani- 

'*Adapted from History of England, I, chap, iii (1848). 



PROJECTS OF SOCIAL REFORM 789 

tary police and medical discoveries may have added several more 
years to the average length of human life ; that numerous comforts 
and luxuries which are now unknown, or confined to a few, may 
be within the reach of every diligent and thrifty workingman. And 
yet it may then be the mode to assert* that the increase of wealth 
and the progress of science have benefited the few at the expense of 
the many, and to talk of the reign of Queen Victoria as the time 
when England was truly merry England, when all classes were 
bound together by brotherly sympathy, when the rich did not grind 
the faces of the poor, and when the poor did not envy the splendor 
of the rich. 



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